Bank of America Solutions for Importers

Transcription

1 Bank of America Solutions for Importers An Importer s Guide to Global Trade Services Bank of America Merrill Lynch Solutions for Exporters 1

2 Table of Contents An Importer s Guide to Global Trade Services Introduction to Global Trade Services 02 Overview of Trade Services 03 Understanding Your Payment Options 05 Trade Solutions 10 Risks 15 Working with Your Bank 17 Services to Meet the Diverse Needs of the Importer 21 Let Bank of America Introduce a Few Ways You Can Increase Opportunities 23 Import Letters of Credit Defined 29 Frequently Asked Questions 31 Parties and Roles in Commercial Letter of Credit Transactions 32 Mitigating the Risk of Fraud in the Trade Arena 33 Anti-Money Laundering Policies and OFAC Compliance at Bank of America 35 20Most Important Characteristics of an Import Letter of Credit 37 Understand and Control Your Import Letters of Credit 38 Opening a Commercial Letter of Credit 42 Understanding the Commercial Letter of Credit Application 45 A Discussion of UCP A Discussion of the eucp 57 S.W.I.F.T. Samples and Comments on Specific Fields 59 Comments on Specific Fields in Preceding Sample 63 Purchase Order-to-Pay Service 67 A Closer Look at Letter of Credit Documents 68 What Are Some of the Typical Documents Required in a Letter of Credit? 81 Frequently Asked Questions 82 A Discussion of the ISBP 84 Documentary Collection for Importers 89 Cash Flow Diagram 02

3 Table of Contents Bankers Acceptances Under Import Letters of Credit 96 Bankers Acceptances Cash Flow Diagram 97 Obtaining Your Merchandise 99 Incoterms International Shipping/Trade Terms 104 Incoterms Summary of Sellers/Buyers Responsibilities 105 Standby Letters of Credit and Special Purpose Letters of Credit 106 Standby Letters of Credit 109 Special Purpose Letters of Credit 111 International Cash Management and Foreign Exchange Services 112 International Treasury Management Services 115 Foreign Exchange Services 116 Payments Direct FX Wires and Drafts 117 Seminars and Workshops 118 Accounting Considerations 119 International Trade Glossary 128 Table of Weights and Measures The material presented in this guide is for informational purposes only, and is not intended as an exhaustive treatise on international banking, nor is it intended to explore all the possible risks involved in using import letters of credit or other services mentioned. 03

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5 Chapter 01 Introduction to Global Trade Services Overview of Trade Services What do we mean by trade services? Trade is a broad term covering a variety of transactions linked to the export and import of goods. Traditional trade services include letters of credit, international collections and bankers acceptances. What is the history of trade? The economic history of man has led us from self-sufficiency to division of labor, from provision of bare necessities to satisfaction of sophisticated needs. The primitive caveman attended only to his own needs, but civilization soon progressed to a stage in which each individual specialized in what he could do best and exchanged his surplus output for that of his neighbor. This was the beginning of trade. When small city-states developed into nations, the need for trade increased. No nation could supply all of its needs with its own resources. Consequently, these small city-states had to begin trading with one another. What may have started as barter led to the development of currency, silver and gold coins and eventually to paper notes and negotiable instruments such as letters of credit. As far back as the fifteenth century BC, Phoenician traders carried letters of credit to foreign ports in the form of clay tablets, stamped with the seals of prominent merchants. During the Middle Ages, letters of credit were written on sheepskins and used extensively by traders such as Marco Polo. Today business is conducted not only domestically but also abroad. As the search for new markets and lower cost labor has led to international commerce, so it has led to finding alternative ways to do financial business overseas. The buyers and sellers in international trade are confronted with diverse geographic, social, economic, and political conditions. The dynamic interplay of these forces requires the trading partners to assess the risks of the transaction and to decide how the risks may be reduced or eliminated. What is the primary role of a bank in international trade? The primary role of a bank is to provide risk reduction alternatives to both the buyer and the seller. This booklet will attempt to examine the many facets of international trade from an importer s, or buyer s, point of view. What happens in a trade transaction? A seller approaches or is approached by a potential buyer. Trade transactions begin with the negotiation of a contract between a buyer and a seller and end with the exchange of goods or services for monetary payment. Why do you need Bank of America Global Trade Services? As noted above, trade can be domestic or international. Clients utilize Bank of America Global Trade Services specifically to overcome the risks of doing business abroad, where the cultures, regulations, and payment conventions may differ significantly from those in the United States. In the United States, you could potentially 02

6 Chapter 01 Introduction to Global Trade Services perform your own analysis on your potential sellers and with a sense of security close a deal. In this case, your bank would get involved only in the collection and/or disbursement of funds. Overseas, you need greater protection when dealing with sellers who are less well known and where you could potentially have limited legal ability to collect for any loss suffered. Hence, a bank provides up-front financial protection in the form of letters of credit, as well as offers guidance and support in the use of other forms of payment. Bank of America works to be a value-added business partner and reaches beyond offering world-class services. We provide a consultative approach to trade services in which our clients draw from the solid base of experience and expertise of a dedicated staff eager to propose new ideas. Understanding Your Payment Options How will you pay for your shipment? Nations, companies and individuals have engaged in trade for centuries and, from the beginning, have searched for the best means of securing payment. Today, an importer has four basic alternatives for providing payment to sellers of imported goods. Each method addresses certain levels of risk for the buyer and the seller. Open Account: The seller ships the goods in advance of payment or according to the negotiated terms. In this instance, the seller relies on the buyer s good faith that the payment will be made after he has received the goods. Traditionally, if open account or cash in advance are agreed upon as the payment method, documentation covering shipment of merchandise is handled outside of banking channels. The banking system at one time was only involved in the remittance of funds. Banks are now involved in the facilitation of open account payments, using varying degrees of conditional checking of original purchase orders against invoices. Bank of America offers a Purchase Order-to-Pay service, with three levels of data matching. Please see Chapter 4 of this Guide for details. If payment is to be made using a collection or letter of credit, a bank normally adds its service and documentary expertise on behalf of either the buyer, the seller, or both. In all cases, the actual movement of funds is done via one of our traditional cash management products such as direct debit or credit to an account, wire transfer, or check. Collection: There are two types of Collections: clean and documentary. Clean: A clean collection refers to the absence of supporting documentation. A check or a draft is presented for payment under a clean collection. Check: Payment by check is typical for domestic open account transactions, but less appropriate for international transactions. In an international transaction, overseas sellers must give checks to their banks for collection and conversion to their home currency, a process that can take three to six weeks. A more satisfactory method therefore is the wire transfer; buyers instruct their banks to arrange for the seller s bank account to be credited directly. D r a f t : A draft is an instrument much like an ordinary check in appearance which, in this circumstance, is used as a formal demand for payment. It is also known as a bill of exchange. 03

7 Chapter 01 Introduction to Global Trade Services Documentary: A documentary collection provides a buyer and seller with a measure of protection whereby a bank intermediates to exchange payment for documents of title to the goods. The collecting bank releases the documents, which normally allows the buyer to take delivery of the goods. The bank then either wires the buyer s payment to the remitting/seller s bank for credit to the seller s account or creates an acceptance (please refer to Chapter 7 for an explanation of acceptances) covering the transaction. There are two forms of documentary collections: regular and direct. regular: After making a shipment, sellers present the shipping documents to their banks, who in turn send them to the buyers banks for payment or acceptance. Direct: The sellers/exporters deliver the documents with a collection letter to the foreign collecting banks themselves and send copies of the collection letter to their banks for follow-up (tracing and payment settlement). The collection letter or form is provided to the seller by the seller s bank and bears the seller s bank letterhead and the collection reference number. Letter of Credit (LC): This is a trade finance instrument issued by a buyer s bank in favor of a beneficiary/ seller, which substitutes the bank s credit-worthiness for that of the buyer. In a narrow sense, it is a specialized instrument used to guarantee payment for a shipment of goods or services fromone party to another. A letter of credit is payable against conforming documents. Cash in Advance: The buyer pays in advance of shipment of goods or according to the terms, such as cash on delivery. As an importer, you most likely will not agree to this option, as you will be out the cash before receipt of the goods. What types of agreements are made between the buyer and the seller? The sales contract is an agreement between the buyer and the seller in which the various terms, conditions and details of the transaction are specified. Given the complexities of international trade, it is important that the sales contract state, in terms clear to all parties, the requirements involved in the transaction. In the simplest form, the sales contract is an accepted order to buy or offer to sell that arises from correspondence between the buyer and seller. The agreement may be made verbally or in writing. The buyer may initiate the correspondence by inquiring as to the price and terms of sale for specific merchandise or by simply placing an order for the merchandise when the price and terms have previously been established. The sales contract has four main components: Description of the goods Price Method of payment Timing of delivery Although contracts can be verbal, it is highly recommended that they be formalized in writing in all situations. The sales contract should clearly specify the documents required for any international transaction. The letter of credit must specify the documents required for payment under the letter of credit. The seller is responsible for the production and/or procurement of all documents. Documents required under letters of credit will be more thoroughly discussed in Chapter 5. 04

8 Chapter 01 Introduction to Global Trade Services A purchase order is a common vehicle that the buyer uses to place an order for merchandise or services when the price and terms have previously been established. Unlike a sales contract, it should always be submitted by the importer or buyer. A purchase order should itemize in precise detail the description of the goods, quantity ordered with unit description and delivery instructions for each item. If a purchase order is referred to within the merchandise description of a letter of credit, this can help make the seller responsible for providing merchandise according to the submitted purchase order. The seller can also be required to state that merchandise is in accordance with the buyer s purchase order when submitting documents, thereby making the seller responsible for the fulfillment of the purchase order. A purchase order can also be used without a letter of credit for an open account payment. As you will see in Chapter 4 of this guide, Bank of America now provides an electronic solution for importers who wish to utilize open account payments but want the assurance of conditions matching against their purchase order prior to payment. How does Bank of America support its Global Trade Services clients? Bank of America is able to act on many fronts for our clients. We act as financial service consultants. We provide import and export financial services to our clients. We act on clients behalf both domestically and overseas via our global branch network. We provide various credit services to support clients import/export needs. We provide economic analyses and forecasts about various countries around the world. We listen to our clients needs for new technology that will keep them competitive in the world marketplace, and then we put our experts to work on solutions that meet their needs. Trade Solutions What international trade services are available with Bank of America? As a truly global organization, Bank of America is uniquely positioned with trade services and expertise to serve clients needs in markets worldwide to help them seize international opportunities wherever they arise. Our services range from trade services and lending to liquidity management, payment services, structured trade finance, and foreign exchange services. We deliver what client s organization need to succeed in international business by offering innovative, tailored solutions, a wealth of trade expertise, the latest in technology, and a network of offices around the world. With more than 1,000 trade specialists in over 50 offices worldwide and an extensive international correspondent bank network, we can provide the global reach and regional expertise to help you accomplish your trade goals. Bank of America finances international trade through bankers acceptances as well as several types of letters of credit. It also offers various open account, collections and reimbursement services. 05

9 Chapter 01 Introduction to Global Trade Services Open Account Services As you ll learn in Chapter 4 of this guide, Bank of America and other international banks have been involved in open account services for years, but at Bank of America we ve recently added an electronic engine to the process on our Bank of America Direct Trade Services platform, providing initiation and reporting on open account payments as well. Additionally, Bank of America specialists route international payments as quickly as possible to their final destination, often by simply crediting one of them any accounts our correspondents keep with us. When you need documentation sent with your payment, or your supplier prefers checks, our foreign draft service allows you to draw a check on a local bank in multiple currencies. Our foreign exchange services provide comprehensive foreign currency payment services, and the ability to purchase competitively-priced spot and forward contracts for payments on import transactions. Please refer to Chapter 11 of this guide for more information on foreign exchange and international cash management services offered by Bank of America. Bankers Acceptances A bankers acceptance is a negotiable instrument that is drawn on, and accepted by, a bank to finance a traderelated transaction. It is often a relatively inexpensive way to finance trade transactions. Bankers acceptances are versatile and can be used for several purposes: acceptances can cover both documentary letters of credit (Documentary BAs) and open account transactions (Clean BAs). They can finance imports, exports, and domestic transactions. Acceptances offer a source of funds at competitive rates since banks are not required to provide reserves for financing such transactions. Acceptances are very liquid they can readily be sold in secondary markets. Non-Discounted Bankers Acceptances Bank of America either creates and accepts or accepts a time draft drawn on us which relates to a specific financial transaction in which our client is involved. We are obligated to pay the specified amount on the maturity date of the draft. Our obligation for payment to any holder of the draft at maturity date is unconditional, independent of the underlying financial transaction. Discounted Bankers Acceptances Bank of America creates or accepts, and discounts, a time draft drawn on us which relates to a specific financial transaction in which our client is involved. The drawer is paid at the time of acceptance of the draft, less fees and discount charges. The discount rate applied is based on the market rate that investors in the secondary market are paying for drafts of various tenors and amounts; this rate fluctuates daily. In recent years the cost of financing on an acceptance basis has generally been lower than prime-rate-based lending. Letters of Credit A letter of credit is an instrument issued by a bank by which the bank substitutes its obligation to pay the seller for the obligation of the buyer, on specified terms. Letters of credit have many variations. Standby Letters of Credit Standby letter of credit is a term used for the type of letter of credit that functions like a guarantee. Standby letters of credit usually provide a type of monetary assurance to compensate a beneficiary in the event of noncompliance by the applicant with the terms of a contract. They are often used instead of cash deposits or as performance or bid bonds in international and domestic transactions. Like other letters of credit, standby letters of credit provide a bank s name and credit support for a specific transaction. In a standby letter of 06

10 Chapter 01 Introduction to Global Trade Services credit, the beneficiary looks first to the account party for payment before seeking payment from the bank. Standby letters of credit can cover either financial, performance or trade-related transactions. Financial Standby Letters of Credit We issue a standby letter of credit for our client or add our confirmation to a standby letter of credit issued by a correspondent bank. Financial obligations involve repayment of funds borrowed or advanced in the event the applicant fails to do so. In effect, we substitute our own credit standing for that of our client (or our correspondent bank) and assure that payment will be made in the event of default. Performance Standby Letters of Credit In this type of obligation, we assure compensatory payment to the beneficiary in the event that the applicant does not perform the contractual agreement the applicant has entered into with the beneficiary. We add our credit standing to that of our client (or our correspondent bank) and assure that payment will be made in the event of default under bid bonds or performance bonds. Commercial Letters of Credit Commercial letters of credit involve payment in exchange for compliant documents required under a letter of credit, relative to goods shipped or services performed. The beneficiary obtains payment from the issuing bank or confirming bank (if any). Import and export letters of credit are types of commercial letters of credit. Import Letters of Credit We issue a new documentary letter of credit for our client. By doing so, we substitute our own credit standing for that of the buyer and assure that payment will be made to the seller if terms and conditions of the letter of credit have been fulfilled. Export Letters of Credit Export letters of credit, when properly executed, may help protect an exporter s (beneficiary s) interests against the risk of losing title to the goods until they are paid. Bank of America assists with the structuring of letters of credit, arranges for their confirmation and identifies discrepancies in documents that may delay payment. Confirmed Export Letters of Credit Another bank, usually one of our correspondents, issues its own letter of credit and asks us to authenticate it, add our confirmation to it and advise it to the beneficiary. When we confirm another bank s letter of credit, we add our credit standing to that of the issuing bank and guarantee that payment will be made to the seller if terms and conditions of the letter of credit have been fulfilled. Unconfirmed Export Letters of Credit A bank, usually the applicant s bank in the country of the applicant of the letter of credit, issues its own letter of credit and asks us to authenticate it and advise it to the beneficiary without adding our own confirmation. Deferred Payments Import LC Deferred Payments Deferred payments are created under import letters of credit that we issue for the applicant, our client. We are obligated to make payment on the designated maturity date. As no draft, or negotiable instrument, exists under a deferred payment letter of credit, the beneficiary cannot obtain payment prior to the maturity date. There is no draft to discount. See this guide s section on page 92 for more information about drafts. 07

11 Chapter 01 Introduction to Global Trade Services Confirmed Export Deferred Payments Payments under letters of credit issued by correspondent banks are postponed (after presentation of documents) for periods of time as stipulated in the letter of credit. If we add our confirmation to the correspondent bank s letter of credit, we are obligated to make payment on the designated maturity date whether or not the funds have been made available to us by the issuing bank. The advantage of a negotiable instrument in the form of a draft does not exist and, therefore, the beneficiary cannot obtain payment prior to the maturing date, as there is no draft to discount. See this guide s section on page 92 for more information about drafts. Unconfirmed Export Deferred Payments As in the case of unconfirmed letters of credit, we will pay only when and if funds have been made available to us by the issuing bank. The advantage of a negotiable instrument in the form of a draft does not exist and, therefore, the beneficiary cannot obtain payment prior to the maturing date, as there is no draft to discount. See this guide s chapter on page 92 for more information about drafts. Reimbursements Unconfirmed Reimbursements An issuing bank authorizes Bank of America to debit its account and to pay claims made by paying, accepting or negotiating banks. We will make such payments only if the issuing bank has sufficient funds on deposit with us to cover the claim. Confirmed Reimbursements An issuing bank asks Bank of America to confirm its obligations under a letter of credit it has issued and authorizes us to debit its account and to pay claims made by paying, accepting or negotiating banks. By adding our confirmation, we add our bank s creditworthiness to that of the issuing/authorizing bank and are obligated to make payment whether or not the issuing/authorizing bank has sufficient funds on deposit with us to cover the claim. Air Release Bank of America issues our indemnity on behalf of and for the account of our client in favor of an airline for the purpose of authorizing the carrier to release a shipment of goods when the air waybill has been consigned to the bank. In return for our issuing the indemnification on our client s behalf, our client must provide us with an indemnity in our favor. This arrangement pertains to import letters of credit and incoming collections. Shipside Bonds/Steamship Guarantees Bank of America issues our indemnity on behalf of and for the account of our client in favor of an ocean carrier for the purpose of authorizing the carrier to release a shipment of goods without the normally required shipping documents. In return for our issuing the indemnification on our client s behalf, our client must provide us with an indemnity in our favor. This arrangement also pertains to import letters of credit. Collections Incoming Clean Domestic Collections Bank of America receives a clean collection from a domestic bank. We will serve as collecting bank and communicate with the drawee, usually our client, to facilitate payment to the remitting bank. 08

12 Chapter 01 Introduction to Global Trade Services Incoming Clean International Collections Bank of America receives a clean collection from a foreign bank. We will serve as collecting bank and communicate with drawee, usually our client, to facilitate payment to the remitting bank. Outgoing Clean Domestic Collections Bank of America opens/sends a request for payment to a domestic collecting bank at the request of our client. When paid by the collecting bank, we will remit funds to the drawer (our client). Outgoing Clean International Collections Bank of America opens/sends a request for payment to a foreign collecting bank at the request of our client. When payment is received from collecting bank, we will remit funds to the drawer (our client). Incoming Documentary Collections Bank of America receives a documentary collection from another bank. We will serve as the collecting bank and communicate with the drawee, usually our client, to facilitate payment to the remitting bank. Outgoing Documentary Collections Bank of America opens/sends a request for payment of documents to a collecting bank at the request of our client. When paid by the collecting bank we will remit funds to the drawer (our client). Export Bills Collections Bank of America creates a collection instrument for tracking and receiving funds due a correspondent bank in exchange for documents sent to a third bank. Delivery of documents may be an integral part of the service. Trade Acceptances A trade acceptance is a time draft that is accepted for payment by a party other than a bank usually the buyer. This could apply to any of the types of collections, as defined above. 09

13 Chapter 01 Introduction to Global Trade Services Risks Trade involves buyers and sellers seeking to exchange goods or services despite their differences in language, national custom, credit procedures and accounting practices. Merchants have always had, and continue to seek, ways of minimizing the risk of non shipment and/or risk of nonpayment. Following is a chart comparing the payment terms. Table 1.1: Comparison of Payment Terms with Relative Risk* Method of Payment Goods Available to Buyer Timing of Payment to Seller Risk to Buyer Risk to Seller Sight Letter of Credit Upon settlement of LC unless goods consigned direct to buyer When documents have been presented and found to comply with LC terms (normally after shipment) Has assurance of shipment but relies on seller to ship goods as described in the documents Very little or none based on conditions in the LC and provided no discrepancies between documents and LC Time (Usage) Letter of Credit Upon the bank releasing documents of title, unless goods consigned direct to buyer Upon maturity of payment terms, or upon discounting of a bankers acceptance Actual payment (regardless of product quality) is due after possession of goods Very little or none, based on conditions in the LC and provided no discrepancies between documents and LC Sight Draft for Collection DP1 After payment unless goods consigned direct to buyer Upon presentation of draft and documents to buyer Has assurance of shipment but relies on seller to ship goods as described in the documents Possible nonpayment by buyer Time Draft for Collection DP2 Upon acceptance of time draft, unless goods consigned direct to buyer Upon maturity of time draft trade acceptance Buyer undertook obligation to pay when accepted time draft; relies upon seller to ship goods as described Possible nonpayment by buyer at maturity of trade acceptance (buyer has possession of the goods) Open Account Upon delivery Upon payment of invoice None Full reliance on buyer to pay invoice as agreed * None of these payment methods protect against fraud. This chart is provided for information and illustration only. It does not purport to encompass all of the possible risks to a buyer or seller involved in any given trade transaction. 1 DP1 Also known as Documents Against Payment or Cash Against Documents (CAD). 2 DP2 Also known as Documents Against Acceptance, Time Draft, and Trade Acceptance.. 10

14 Chapter 01 Introduction to Global Trade Services What are some of the decision factors used in determining payment terms? When do the goods pass from the seller to the buyer and when does payment occur? Can you, as a buyer, trust the seller to deliver promptly with the correct goods if you have already paid for the merchandise (cash in advance terms)? Are you willing to pay promptly if goods are shipped first (open account terms)? The answer to these questions will depend on how well the parties know each other. This knowledge can be gained through experience or research. Alternatively, intermediaries can be used to mitigate the risks; this has been the traditional role of banks. The choice of method of payment (means by which the buyer will pay the seller) takes into account several factors: Physical location of buyer and seller Extent of competition from other sellers Level of personal knowledge or prior experience between the buyer and seller Availability of other buyers Accounting, payment and regulatory restrictions between countries Reputation of buyer and seller Creditworthiness of buyer and seller Customary practices in the individual country or industry Dollar amount of transaction Urgency to receive payment What are the risks associated with making the payment? The importation of goods from foreign markets involves greater risks for you as an importer than those associated with domestic trade. While in domestic trade, you may be willing to pay cash in advance due to good credit information, reliable bank checks, easy communication and an understandable legal system. You will often require greater protection in international trade. The documentary collection and the letter of credit are two such alternatives to open account and cash-in-advance methods of payment. Both of these alternative methods of payment protect the buyer and the seller from losses in varying degrees and offer both the buyer and the seller varying degrees of convenience in making payments. In general, the greater the protection for the buyer, the less convenient and the more costly the payment terms are for the seller. One of the most important determinants of the payment method to be utilized in any particular transaction is the level of risk in the transaction. You, as buyer, must always weigh the risks and the amount of protection desired against being noncompetitive within your market. During the negotiation process, both sides must: Analyze the major risks they encounter in international trade transactions Review alternative payment methods, the levels of protection and the types of financing provided with each one Understand the various factors that must be considered in the formulation of a sales contract Understand international credit policy as related to the transaction 11

15 Chapter 01 Introduction to Global Trade Services What overriding risks are always factors to consider? Commercial Risk As a buyer, you are primarily concerned with whether sellers can and will ship the goods. You need to determine if sellers have the ability to produce or obtain the goods, as well as whether they will ship the products in a timely fashion. Not only do you need to know if they will ship, you are also vitally interested in knowing if the goods will be of the quality and quantity ordered and expected. To help mitigate commercial risk, you can investigate your sellers trade references from other buyers (whose names you have requested from the supplier) and/or through local World Trade Centers or Chambers of Commerce. Political and Economic Risk You should also familiarize yourself with information concerning the economic and political stability of the country in which you re doing business. This information should also include current and future trends of the country s economy, political situation and the possibility of the implementation of exchange controls. Bank of America economists follow the economic and political situations in most countries very closely and can be an excellent source for this type of information. Other sources are foreign country consulate offices and various publications produced by Dun and Bradstreet International, the U.S. Department of Commerce International Trade Administration, Moody s, local Chambers of Commerce or World Trade Centers. Economic and political risks you might want to be aware of are: cancellation of export licenses due to currency freezes, hostile laws and court systems, civil war, boycotts and sanctions, confiscation of merchandise, currency devaluation, liquidity problems and implementation of exchange controls. Which are the riskiest payment methods? Cash in Advance is riskiest to the buyer. Open Account is riskiest to the seller. You must weigh the pros and cons of using the various payment methods against the risks. The chart below should help to visualize the risks. Payment Method Risk Risk to Seller Risk to Buyer Riskiest Open Account Documentary Collection Letter of Credit Cash in Advance Riskiest 12

16 Chapter 01 Introduction to Global Trade Services How do you determine the appropriate payment option? In addition to the very important payment and shipment risks, the following chart gives some guidelines on determining which payment options may be appropriate for a particular trade transaction. Please note that the key determinants are: Relationship, Type of Goods (stock or custom), Political and Economic environments, and the importance of Timely Cash Flow and Delivery. Table 1.2: Payment Options Cash in Advance Letter of Credit Documentary Collections Open Account Relationship New New Established Established Type of Goods Custom made Custom made Stock items Stock items Political Unstable Unstable Stable Stable Economic Unstable Unstable Stable Stable Timing of Cash Flow and Delivery Yes Yes No No What are the advantages of letters of credit to the buyer (importer)? Buyers can benefit in the following ways: Buyers usually do not have to tie up working capital prior to actual shipment of merchandise Letters of credit allow for flexibility in documentary requirements Buyers are assured that their bank will pay the seller only when the seller s documents conform to the terms and conditions of the letter of credit Letters of credit offer the opportunity to receive extended payment terms from the seller, by arranging for a letter of credit that is payable at a future date Letters of credit provide the ability to delay payment until documents are received This type of payment mechanism enhances the buyer s ability to plan sales and distribution because latest shipping date is known Barring supplier fraud, payment is limited to what was ordered Bank of America can issue letters of credit denominated in foreign currency, which enables the buyer to comply with seller s request for payment in foreign currency. 13

17 Chapter 01 Introduction to Global Trade Services What are the risks of letters of credit to the buyer? Letters of credit deal only in documents, not in goods. The major risk may be that the merchandise may not be as it is represented in the documentation. What are the advantages of letters of credit to the seller (exporter)? Sellers can benefit in the following ways: Minimized credit risk by shifting risk from the buyer to the buyer s bank Reduced commercial/political risk by shifting it from the buyer to the buyer s bank Provides assured and prompt payment by reducing the risk that payment for the goods might be delayed or otherwise jeopardized by political or foreign exchange problems in the buyer s country Improved ability to obtain bank financing. What are the risks to the seller? The seller s documentation must conform exactly to the terms and conditions of the letter of credit to ensure payment. What about the risk of fraud? Since the beginning of time, buyers with specific needs have been approached by sellers who claim to be able to fulfill those needs, but have no intention of doing so. As markets in certain countries tighten and economies in these countries suffer, fraudulent schemes will be increasing. These schemes will proliferate particularly in countries with few or no exchange controls, weak legal systems and an inability to use their resources in the global mainstream. Please refer to pages of this guide for information about Bank of America s procedures and policies that attempt to prevent fraud, money laundering and other illegal activities. 14

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19 Chapter 02 Working With Your Bank As an importer, you know that sourcing products globally can lower costs, broaden product lines, and diversify sources of supply. You also know the challenge of getting the right product to the right place the right time. Different time zones, languages, and business practices hinder communication. Lengthy shipping times and customs clearances complicate inventory management. And the payment terms demanded by overseas suppliers can tie up your credit and slow down the flow of documents needed to clear merchandise through customs. You need specialized banking services to help overcome these obstacles. You need a bank with seasoned experts in international trade and a family of specialized banking services tailored to the unique needs of the importer. You need Bank of America Import Services Bank of America Import Services offers you a comprehensive array of services; services that can help you receive products quicker, reduce the amount of credit you have to tie up, and ease your administrative burdens. Our network of correspondent banks is extensive, allowing us to work directly with your supplier s banks. With this worldwide network of correspondent banks, Bank of America can help you access almost any market. Payment options to meet your needs Bank of America stands ready to assist you with a full range of payment options. Our international trade specialists can assist you in selecting the option that best fits the needs of both you and your vendors. Whether you are buying on open account, with cash against documents or on a letter of credit basis, we have the resources and the expertise you need. And we deliver our services in almost any currency you might choose. Our specialists are dedicated to handling your transactions as efficiently and as smoothly as possible. Accessible expertise Bank of America has more than 1,000 experienced international trade specialists dedicated solely to the management and growth of our clients international business. Strategically located from coast to coast in the United States and in various foreign locations, we travel extensively to keep in touch with clients. Our expertise in structuring import transactions offers you the kind of knowledge and experience you need. 16

20 Chapter 02 Working with Your Bank Innovative services developed as needs change Bank of America has developed a forward-looking suite of electronic banking services, allowing importers to initiate transactions and receive reports via the Internet with the use of Bank of America Direct Trade Services. By fully integrating electronic applications into our global issuance system, we can issue your letters of credit faster and more accurately. Take advantage of the trade module, Trade Services, to: Increase processing efficiency and decrease processing errors Easily share trade data critical to business partners both within other areas of your organization and with outside partners such as freight forwarders and customs brokers Have better and faster access to your global trade activity and information Enjoy round-the-clock access to your trade information no matter where you re located. As a premier provider of cash management services, Bank of America has developed innovative sweep accounts and automatic investment services to keep your money working longer for you. An extensive network Our correspondent bank network is able to handle almost any import transaction efficiently. Over the past thirty years we have carefully developed and cultivated an extensive network of correspondents worldwide. Our network allows us to deal directly with your vendors banks, saving you time and money. Our in-depth knowledge of overseas markets and business practices can be invaluable to importers seeking to structure unusual transactions. Services to Meet the Diverse Needs of the Importer Open Account Lowering fees and streamlining financial supply chain processes are a top priority for most buyers. At the same time, ensuring vendors have financing options similar to those associated with traditional letters of credit is an important consideration. Bank of America is committed to developing solutions to assist buyers in optimizing and integrating their supply chains. Our open account payment solutions help clients re-engineer their trading processes and unlock substantial amounts of working capital for their company and their trading partners. Bank of America has enhanced its Bank of America Direct Trade Services to handle purchase order advising, tracking and reconciliation for letter of credit and open account payments. Our goal is to integrate letters of credit, documentary collections and open account trade payments seamlessly into each customer s preferred electronic delivery channel. A complete description of this service is provided in Chapter 4 of this guide. Documentary Collections Many clients find that suppliers who initially ask for cash in advance or a letter of credit may be willing to sell on a documentary collection basis. Commonly referred to as cash against documents or as sight draft terms, this payment mechanism allows foreign vendors to instruct Bank of America to retain control of the shipping documents until payment is made or their draft is accepted. By routing Documentary Collections through Bank of America, vendors are assured that a world-class bank is following their instructions. Our clients benefit by not having to prepay for the product or tie up their credit. 17

21 Chapter 02 Working with Your Bank Letters of Credit Letters of credit continue to be one of the most common payment options used in international trade, especially for imports from Asia and Latin America. Bank of America has international trade specialists to help you structure your letters of credit and a correspondent bank network that can get the letter of credit to your supplier as quickly as possible. As one of the largest issuers of letters of credit in the world, Bank of America has invested in electronic application systems that free our clients from retyping any of the standard clauses in their letters of credit. Using a standard Web browser, you supply only the details specific to the particular transaction and send the application to us via the Internet. Your Web-based electronic applications are fully integrated into our issuance system for truly superior response time and accuracy. This same system gives you activity and status reports, available on your personal computer at your convenience. Letters of credit are primarily oriented toward protecting the interests of beneficiaries. No letter of credit can protect the buyer against fraud. Protection in any import transaction is contingent upon the performance of the exporter, and there is no substitute for knowing the reputation of your supplier. However, Bank of America s international trade specialists can help structure your credits to better protect your interests. When appropriate, performance bonds, inspection certificates, insurance policies, and more specific shipping schedules can be incorporated into your credits, giving you additional control over the transaction. Our specialists can advise you as to when a standby letter of credit might be an appropriate way to assure payment to a vendor. Whenever you need help in structuring your letters of credit, you can rely on Bank of America. Easy L/C When you re involved in global trade, the need for letters of credit isn t limited by the size of your company. Smaller companies often have modest credit needs and straightforward shipping arrangements, but they shouldn t have to navigate the same complex and time-consuming application, underwriting, and approval processes as larger companies seeking letters of credit with more complicated requirements and higher dollar values. If your import credit needs do not exceed $100, and you have an account with Bank of America, Easy L/C offers a simplified application form and streamlined approval process, which reduces turnaround time and can save you money with a low front-end fee. The application is short and simple to complete. We can even send it to you in electronic format to get your application off to the fastest start possible. Your letter of credit is generally approved and issued within 24 hours. Bank of America doesn t require a secured deposit as collateral for your Easy L/C. It s prepaid from the cash in your company s existing Bank of America account. 18

22 Chapter 02 Working with Your Bank Cash Secured Letters of Credit Cash secured letters of credit are secured by funds that you have in an appropriate Bank of America deposit account for the balance and term of the letter of credit. Cash secured transactions are subject to credit approval; collateral advances can be made on balances on hand subject to financial information verification. Bankers Acceptance Financing Whether you buy on open account with documentary collections or through letters of credit, Bank of America can finance your imports with bankers acceptances. These short-term, fixed-rate instruments can significantly lower your financing costs. As part of letter of credit transactions, bankers acceptances can give you extended terms, allowing your vendors to maintain their cash flow by discounting the instrument at what is normally a very favorable rate. Your vendor can pay some or all of the financing costs. Borrowing procedures and documentation are simple and straightforward. Private Labeling of Letters of Credit Bank of America provides private labeling of letters of credit to qualifying clients. Your company becomes the issuer of letters of credit using an existing subsidiary suitable for the purpose or a new Special Purpose Vehicle company. Bank of America provides the same level of operational support for these letters of credit as provided when we are the issuer of the letters of credit. Private labeling would allow you to significantly reduce your reliance on bank credit, lower letter of credit charges, improve service to your vendors, and improve the efficiency of the process through the intelligent use of technology. Our solutions are designed to give you the choice of how you want to structure the processing of private-labeled letters of credit, and how you would like to structure the financial side of these transactions as well. Additionally, because of our comprehensive and aggressive vendor financing program in Asia, our local trade officers can meet with your vendors, help them prepare for your private-labeled letters of credit, and discuss their financing needs if appropriate. Soft Restriction Program Our soft restriction program is designed to assure that Bank of America is involved on both the import and export side of a letter of credit transaction, thus reducing processing time. When a new commercial letter of credit is issued to a beneficiary in Asia, the letter of credit contains wording that restricts negotiation of the letter of credit to one of our Asian banking centers. When documents under these letters of credit are presented to our Asian banking center, we are able to eliminate the duplicate step of document examination. With this program we create both tangible and intangible value for all involved parties. Applicants will realize the advantages of a streamlined import process due to a lowered discrepancy rate, reduced vendor noise because of lower product cost, faster processing and better control over transactions. For vendors, local bank representatives who are familiar with their accounts can assist in eliminating discrepancies. This will provide faster turn-around times, resulting in increased working capital velocity, lower interest costs and lower transaction costs with more efficient processing. 19

23 Chapter 02 Working with Your Bank Supply Chain Financing Buyers often mandate that their suppliers extend payables terms and move from letters of credit to private label letters of credit or open account terms. This can place significant financial pressure on suppliers who rely on letters of credit to meet their working capital needs. Buyers are now beginning to recognize the need for alternatives that enable their suppliers to obtain financing as an inducement for accepting extended terms. By recognizing their suppliers need for financing, buyers can reduce cost of goods sold (COGS), more efficiently manage working capital and strengthen supplier relationships. Bank of America offers a comprehensive suite of supply chain financing programs that enable buyers to provide their suppliers with access to credit. Foreign Exchange Services Bank of America Foreign Exchange Services give you the option to pay your vendors in their own currency. We provide a full range of foreign exchange services, from simply sending wires denominated in foreign currency to helping corporate clients develop and execute sophisticated hedging strategies. In addition to competitivelypriced spot and forward contracts, options, and futures, our foreign exchange traders can offer information about market trends that can help you plan your foreign exchange strategy. Our London and Singapore foreign exchange operations assure an around-the-clock capability. Cash and Treasury Management Services Bank of America Treasury Management Services help you manage your cash position and cash flow. We build comprehensive, customized solutions to meet the unique needs of our clients, improve their financial competitiveness, and make their treasury functions more efficient. Working together, we can help you streamline the way you make payments, collect your receipts, and reconcile your accounts worldwide. With our broad treasury management suite of services, we guide you through the steps to make your treasury functions more efficient. Small Business Services (Trade Client Services) There may have been a time when you didn t think your company could import merchandise from overseas or sell your goods abroad. Not any more. For companies like yours, great business opportunities lie beyond our country s borders. And isn t opportunity exactly what you seek for your company? Trade Client Services is made up of a team of trade finance professionals with many years of experience. They re waiting for your call and the opportunity to help you find working capital solutions for your organization. Trade Client Services has been organized to cover all U.S. time zones, so you ll easily and conveniently be able to speak with a representative personally. 20

24 Chapter 02 Working with Your Bank Let Bank of America Introduce a Few Ways You Can Increase Opportunities Economic forecasting and industry specialists At portal, click on Investment Solutions to find the latest economic and industry analyses. Banc of America Securities economists, based in New York, Hong Kong and London, analyze and forecast U.S. and international economic conditions and financial market trends and post their findings on this site. The coverage includes analysis of macroeconomic indicators, forecasts of interest and foreign exchange rates, and perspectives on government policies. This work, coupled with research on emerging markets, fixed income, foreign exchange and global risk, supports a wide variety of Banc of America Securities capital markets and client-focused activities. In the end it s all about the people Superior client satisfaction We recognize that you have many choices in banks and that, in the final analysis, service will drive whether you continue to use Bank of America. It s for that same reason that your customers continue to do business with you. We strive to maintain a professional and skilled international banking staff in every office location. Furthermore, we are extremely sensitive to the unique needs of each client. We pride ourselves on a high level of personalized service built on a long-term relationship. Bank of America has extensive involvement with large retail and consumer companies, and therefore is familiar with the seasonal fluctuations that are prevalent in these industries. Our global trade offices are staffed effectively to manage these peak cycles by proactively working with the client to know exactly when these fluctuations will occur during the year. We understand that there are critical times in each client s business cycle and are committed to constantly providing consistent quality service. A global team of trade associates is typically established to meet our client s specific processing requirements. Bank of America will assign a primary operations contact that is responsible for technical consultation and ensuring compliance with each client s service requirements. In June 2000, Bank of America was proud to receive the International Organization for Standardization (ISO) 9001 certification in recognition of the rigorous quality standards set and achieved by the bank throughout its Asia Operations Center in Hong Kong. In the past few years independent research firms have conducted client satisfaction interviews with Bank of America import letter of credit clients located throughout the United States. Performance measurement categories included timeliness, accuracy, capability, staff knowledge/servicing, technology and client loyalty. Nearly ninetysix percent of our clients reported that they were either very satisfied (highest possible rating), satisfied, or somewhat satisfied with Bank of America s overall import letter of credit service. Our Global Trade Services business is committed to moving to and maintaining a Six Sigma level of client service, and numerous performance measurements are in place to that end. 21

25 Chapter 02 Working with Your Bank Depend on Bank of America Your business is filled with unique and diverse challenges; challenges that demand creative, flexible and comprehensive solutions. To help you find these solutions, you need a partner who has extensive experience, overseas expertise and a wealth of resources. You need Bank of America Import Services. We can provide you with a complete range of payment options and a worldwide correspondent network. We ll take the time to help you determine how you can make your international business run as smoothly, efficiently and profitably as possible. We will also be ready to help you re-evaluate your options as your needs change. For further information, contact your local Bank of America Global Trade & Supply Chain Solutions officer. 22

26 Chapter 03 Import Letters of Credit Defined 023

27 Chapter 03 Import Letters of Credit Defined An import letter of credit is a conditional payment mechanism under which the issuing bank irrevocably promises to pay the seller if presented documents comply with all of the letter of credit terms and conditions. The issuing bank substitutes its credit for that of the buyer. All letters of credit have similar attributes and this section will restate some of those attributes. It is important not only to understand the attributes, but also the underlying principles. A commercial letter of credit offers protection to both the buyer and seller and, for this reason, is often used as a means of payment. A letter of credit offers the buyer a high degree of assurance that goods and services will be delivered and reduces trading risks. In the letter of credit process, the bank is the intermediary between the seller (an exporter) and the buyer (an importer). The issuing bank issues the letter of credit on behalf of the importer, examining the documents received, to ensure conformity to the terms and conditions of the letter of credit. If the documents are correct, the bank makes payment, either immediately or at a specified future date. When the bank issues the letter of credit, it substitutes its credit for that of the importer. In doing so, bank promises to pay the exporter upon presentation of documents in good order. The bank deals only with the documents called for in the letter of credit, not with the actual goods involved. For example, if a letter of credit specifies that the exporter ship a container of steel and the quality of the steel does not meet the buyer s expectations, the exporter will nevertheless be paid as long as documents are presented in conformity with the terms and conditions of the letter of credit. Typically the exporter s bank acts as the advising, examining and paying bank. It may also confirm and negotiate letters of credit on its client s behalf. Prior to any letter of credit transaction, the buyer and seller should negotiate and agree to the terms and conditions to be specified. Bank of America can help structure your import letter of credit and suggest terms that are favorable and achievable to both you and your suppliers. This facilitates LC compliance, which ensures that you receive your commercial shipment according to the terms agreed upon without delay. 24

28 Chapter 03 Import Letters of Credit Defined Letter of Credit Flow Chart Buyer Issuing / Buyer s Bank Seller s Bank Seller Buyer STEP ONE Buyer Applies for Letter of Credit STEP TWO Buyer s Bank Issues LC and... STEP THREE Transmits LC to Seller s Bank STEP FOUR Advises LC to Seller STEP FIVE Goods Produced and Shipped Seller Seller s Bank Issuing / Buyer s Bank Buyer STEP SIX LC Presented to Seller s Bank with Required Documentation STEP SEVEN Seller s Bank Examines Documents and Sends Documents to Issuing Bank STEP EIGHT Issuing Bank Examines Documentation STEP NINE Issuing Bank Debits Buyer s Account and Releases LC Documents Making Funds Available for Payment to Seller Seller Buyer 10 STEP TEN Buyer Exchanges Documents for Goods 25

29 Chapter 03 Import Letters of Credit Defined Letter of Credit Flow Chart Steps 1 Through 4 Buyer Issuing / Buyer s Bank Seller s Bank Seller STEP ONE Buyer Applies for Letter of Credit STEP TWO Buyer s Bank Issues LC and... STEP THREE Transmits LC to Seller s Bank STEP FOUR Advises LC to Seller 01 The buyer fills out a letter of credit application that satisfies the terms of the purchase agreement plus the requirements of customs law, shipment and document coordination. 02 The issuing bank, usually the buyer s bank, rechecks the application to ensure that it is complete and workable. 03 The issuing bank transmits the credit to a correspondent bank by telex, S.W.I.F.T. or (rarely) airmail and asks them to advise and/or confirm the instrument. 04 The correspondent bank receives the letter of credit, checks for authenticity, records the transaction and transmits the instrument to the seller/beneficiary, adding their confirmation if requested. Upon receipt of the letter of credit, the seller should carefully review it to determine whether its performance requirements can be complied with and whether it is acceptable from a credit perspective. 26

30 Chapter 03 Import Letters of Credit Defined Letter of Credit Flow Chart Steps 5 Through 7 Seller Seller Seller s Bank Issuing / Buyer s Bank STEP FIVE Goods Produced and Shipped STEP SIX Documents Presented to Seller s Bank STEP SEVEN Seller s Bank Examines Documents and Sends Documents to Issuing Bank 05 Upon determination that the letter of credit is acceptable, the seller should ship the goods precisely consistent with its terms and conditions. 06 The seller must prepare documents exactly as required and present them to the proper paying bank. The proper paying bank may be any bank specified in the credit to accept, pay or negotiate. This may be the advising bank, confirming bank, issuing bank or (on a freely negotiable credit) any bank that is willing to negotiate. 07 When the paying bank receives the documents, it will examine them to determine if they are in order pursuant to the credit s terms and conditions. If in order, the bank may pay, accept, or negotiate as required by the letter of credit. The negotiating bank will transmit the documents to the issuing bank and request reimbursement. Under an LC payable at sight, the issuing bank may effect reimbursement to the seller s bank by remitting funds directly to the seller s bank, authorizing the seller s bank to debit the issuing bank s account, or by authorizing the seller s bank to claim from a third bank where the issuing bank maintains an account. 27

31 Chapter 03 Import Letters of Credit Defined Letter of Credit Flow Chart Steps 8 Through 10 Issuing / Buyer s Bank Seller s Bank Issuing / Buyer s Bank Buyer Seller STEP EIGHT Issuing Bank Examines Documents and Reimburses Bank STEP NINE Issuing Bank Debits Buyer s Account and Releases LC Documents, Seller Receives Payment STEP SEVEN Seller s Bank Examines Documents and Sends Documents to Issuing Bank 08 Upon receipt of the documents, the issuing bank will examine them to ensure that they are in order as specified and then reimburse the negotiating bank. For time drafts, reimbursement is made at maturity of the bankers acceptance. 09 Issuing bank debits buyer s account and releases documents. For a time draft, the buyer s account will be debited at maturity. Seller s bank pays exporter after being reimbursed by buyer s bank. 10 The buyer exchanges the shipping documents for the goods. 28

32 Chapter 03 Import Letters of Credit Defined Frequently Asked Questions What is a letter of credit? A letter of credit is a financial instrument issued, generally by a bank, to an individual or corporation by which the bank substitutes its own creditworthiness for that of the individual or corporation. Letters of credit facilitate importing and exporting by assuring the seller/exporter s payment for goods sold against compliant documents. Without such assurances of payment, foreign trade would be severely curtailed. Why should I use letters of credit when importing? Companies purchasing materials, supplies and services from domestic suppliers generally have established trade credit and can buy on open account terms. In international trade, it is more difficult to establish trade credit, especially with new relationships. Generally, the foreign seller will require either cash in advance or a commercial letter of credit. The letter of credit assures the seller that payment will be received, and it may help the seller obtain financing for the production and shipment of the goods being purchased. In addition to improving your cash flow, the letter of credit gives you some protection because payment will not be made without presentation of all required documents. Those documents must also comply with the terms of the letter of credit. However, the letter of credit does not eliminate the need for you to check out the foreign seller s ability to produce, as well as his integrity and business reputation. Other than my banker, who else should I be using as a resource? In addition to your Bank of America Trade specialist, you can obtain assistance from a great number of sources both public and private. The type of business in which you are engaged and the international expertise of your existing staff will determine who you should use. Some of the more commonly used resources for obtaining importing expertise include: Government Foreign consulates and commercial attachés U.S. diplomatic personnel U.S. Customs personnel Private Trade banking specialists International lawyers Customs brokers A good customs broker is frequently the key to successful importing and should be contacted before finalizing any contracts 29

33 Chapter 03 Import Letters of Credit Defined What agreements are involved in an import letter of credit transaction? 01. Sales Contract. Agreement between the buyer (account party or applicant) and the seller (beneficiary) which gives rise to the use of a letter of credit. 02. Purchase Order. The buyer s order to buy, usually describing merchandise to the unit level of detail. A purchase order is normally submitted directly to the seller by the buyer, either electronically or hard copy. 03. Application for Credit. Agreement between the buyer (applicant) and the issuing bank which spells out their mutual obligations, including that of the applicant to reimburse the issuing bank when payments are made to the beneficiary in accordance with the terms of a letter of credit. For assistance in filling out an application for a letter of credit, refer to page 42 of this Guide. 04. Letter of Credit. Agreement between the issuing bank and the seller (beneficiary) that specifies conditions that must be met before payments will be made. What is the difference between an advised and a confirmed letter of credit? The letter of credit transaction usually involves two banks, the buyer s bank issuing the letter of credit and a bank in the seller s country that advises the letter of credit to the beneficiary. The advising bank may also assume the role of confirming bank. Whether advising and/or confirming, the seller s bank assumes certain responsibilities. Advising: An advising bank acts as the agent of the issuing bank. The function of the advising bank is to take reasonable care to verify the authenticity of letters of credit it receives and then accurately transmit the letters of credit to their beneficiaries. When advising a letter of credit, the bank assumes no liability. On receipt of the documents for examination and payment, the advising bank will pay the seller only if it received good funds and has received reimbursement from the issuing bank, even if it was specifically nominated as the paying bank in the letter of credit. Confirmation: By confirming a letter of credit, the advising bank or another bank assumes the same responsibilities as the issuing bank, including the obligation to pay against presented documents (if they are in order and all of the letter of credit terms are met). In effect, the beneficiary has the individual promise of two banks the issuing bank and the confirming bank to pay against conforming documents. Confirmation of a letter of credit is an extension of credit and requires credit approval of the issuing bank by the confirming bank. When a bank confirms a letter of credit, it takes the credit risk of the issuing bank and must have in place a credit limit for that issuing bank. How is a letter of credit confirmed? When negotiating the terms of sale, the seller may require a letter of credit that requests the advising bank to add its confirmation. The buyer includes this request when submitting the application for letter of credit issuance to his or her bank. In most instances, the issued credit states: Please advise beneficiary adding your confirmation or words to similar effect. Note, this is a request, not a requirement. The advising bank for various reasons may decline to add its confirmation and simply advise the letter of credit without confirmation. What documents are usually required under a letter of credit? The documents for an international sale can vary significantly from transaction to transaction depending on the destination and the product being imported. See Chapter 5 for a detailed discussion of letter of credit documents. 30

34 Chapter 03 Import Letters of Credit Defined Parties and Roles in Commercial Letter of Credit Transactions What are the parties and roles in an import letter of credit? 01. Account Party/Applicant The buyer of goods or services who requests the letter of credit to be opened under its liability by the issuing bank. 02. B e n e fi c i a r y The seller of goods or services to whom the letter of credit is addressed and who is entitled to its benefits. 03. Issuing Bank The primary financial institution that initiates and writes the letter of credit extending its guarantee and liability to pay if the terms and conditions are fulfilled. 04. Advising Bank The bank, usually in the beneficiary s country, whose primary job is to pass on the letter of credit to the beneficiary. The advising bank is normally a correspondent bank of the issuing bank. That means that the two parties have exchanged authentication procedures and may have also established accounts with each other. An important part of passing on a letter of credit to a beneficiary is verifying the authenticity of the letter of credit to it. When the advising bank authenticates the credit, it is saying that the letter of credit is a genuine instrument from the named issuing bank. It is not commenting on the creditworthiness of the bank or its country. This procedure gives the seller some protection against fraudulent instruments. That is why it is common practice to have letters of credit advised to a seller through a correspondent bank. Letters of credit may be received by the advising bank by mail, telex, cable or S.W.I.F.T. (S.W.I.F.T. is the acronym for Society for Worldwide Interbank Financial Telecommunication, a telecommunication network of member banks.) 05. Drawee Bank or Paying Bank This is the bank named in the credit as duly authorized to make payment. Drafts are drawn and/or documents presented to this bank as a general rule. However, special instructions might modify this procedure. In the U.S., this is generally the issuing bank, i.e., the buyer s bank. 06. Examining Bank Both the issuing bank and the seller s bank must examine all documents stipulated in the credit with reasonable care to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the credit. 07. Confirming Bank A confirming bank is a financial institution requested by the issuing bank to add its guarantee of payment or acceptance to the credit instrument. It is necessary for this bank to establish a credit line or facility for the issuing bank in order to agree with this request. The bank requested to add its confirmation is usually but not necessarily the advising or drawee bank. A seller should request the buyer to authorize the issuing bank to request confirmation. Import letters of credit issued by Bank of America do not normally request confirmation from another bank, due to their AAA credit rating. 08. Reimbursing Bank At times, the issuing bank names a bank where the issuing bank keeps funds in the currency of the letter of credit to pay on its behalf, drawee or negotiating banks to whom payment is due. This bank, named in the letter of credit, known as a reimbursing bank, is usually named under the special instructions portion of the letter of credit. See I.C.C. Publication No. 600, Article

35 Chapter 03 Import Letters of Credit Defined 09. Negotiating Bank Negotiation is the process whereby a bank examines the documents and actually pays funds to the beneficiary. This is not very common because most banks are not willing to advance funds prior to receipt of the goods. The beneficiary is paid immediately upon examination of documents conforming to the LC or after approval by the issuing bank is determined by the payment terms stipulated in the letter of credit. The negotiating bank is either nominated by the beneficiary under a freely negotiable letter of credit or designated as a restricted negotiating bank by the issuing bank. The concept of a negotiating bank allows more flexibility into the payment mechanism and enables beneficiaries to present documents for payment to their local bank. Mitigating the Risk of Fraud in the Trade Arena At Bank of America we constantly strive to protect our clients from the risk of fraudulent trade finance transactions. In our Trade Operations units around the globe, many evaluation processes take place each day in an attempt to recognize and prevent fraud. Here are some of the precautions we take: We transmit and receive secure and authenticated letters of credit, collections and related messages via S.W.I.F.T. (Society for Worldwide Interbank Financial Telecommunication; see page 57 of this guide for an example). While the UCP 600 tells us that Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents(s)... (Uniform Customs and Practice for Documentary Credits, 2007 Revision, International Chamber of Commerce), the close and careful examination of documents ensures that they are reflective of the requirements in the letter of credit and thus serves to reduce the likelihood of payment against fraudulent documents. All of our associates that handle trade transactions are required to participate in Anti-Money Laundering training, enabling them to understand the red flags in a transaction that may point to fraud as it relates to money laundering. This training includes Know Your Customer evaluation metrics, and stresses reporting of any suspicious transaction. All of our associates that handle trade transactions attend Compliance Training courses, further refining their skills in recognizing and properly reporting of suspicious transactions. Our associates stay current on fraud issues in our business through trade publications, conferences, internal broadcasts and participation in professional trade organizations. Our Web-based trade activity management system, Bank of America Direct Trade Services, can also help reduce the incidence of trade fraud by providing complete security and one point of entry into the Bank of America back office. 32

36 Chapter 03 Import Letters of Credit Defined Anti-Money Laundering Policies and OFAC Compliance at Bank of America Anti-Money Laundering (AML) Crime has a destructive and devastating effect on the communities in which we operate. Safeguarding the global financial system is critically important for the economic and national security of the jurisdictions in which Bank of America operates. Accordingly, it is the policy of Bank of America to take all reasonable and appropriate steps to prevent persons engaged in money laundering, fraud, or other financial crime, including the financing of terrorists or terrorist operations (hereinafter collectively referred to as money laundering ) from utilizing Bank of America products and services. With a view to ensuring that the financial system is not employed as a channel for criminal funds, associates at Bank of America make reasonable efforts to determine the true identity of all parties involved in Bank of America transactions. Bank of America conducts its trade business in conformity with high ethical standards in the countries in which it does business and strictly adheres to all laws and regulations pertaining to financial institutions. While it is accepted that Bank of America may not always be able to determine whether a transaction originates from, or is a part of, a criminal activity, Bank of America follows these general principles: 01. Bank of America takes reasonable steps to determine the true identity of all customers and beneficial users of Bank of America products and services. 02. Bank of America will not knowingly accept funds from, make loans to, or do any type of business with customers whose money the bank believes is derived from criminal activity. 03. Bank of America will not ignore indications that a customer s money originated from criminal or other money laundering activities. When Bank of America becomes aware of facts which lead to a reasonable suspicion that funds held by it are from criminal or other money laundering activity or that transactions entered into are themselves criminal in purpose, appropriate measures, consistent with the law, will be taken. These include denial of assistance to the client, severing relations with the client, closing or freezing accounts, and when appropriate, filing of a suspicious activity report. 04. Bank of America will avoid providing support or assistance to clients seeking to deceive law enforcement agencies through the provision of false, altered, incomplete or missing information. 05. Bank of America will cooperate fully with law enforcement and regulatory agencies to the extent that it can do so under all applicable foreign and domestic laws. 06. Bank of America will report all identified instances of suspicious activity to the extent that it can do so under all applicable foreign and domestic laws. Anti-Boycott Policy Bank of America Corporation, its domestic affiliates and its offshore branches, offices, subsidiaries and controlled affiliates are U.S. persons. They transact business with residents and nationals of boycotting and boycotted countries as well as with other persons and corporations that do business with such countries and their nationals. Therefore, Bank of America often receives requests to comply with unsanctioned foreign boycotts. 33

37 Chapter 03 Import Letters of Credit Defined Such requests most frequently occur in letter of credit transactions. Bank of America handles several thousand letters of credit and collections each year, which involve persons and commerce of boycotting and boycotted countries. Bank of America is committed to full compliance with all laws applicable to its business, including anti-boycott laws of the United States. Accordingly, bank units must not enter into any agreement or implement any letter of credit containing an impermissible boycott condition or take any other action prohibited by the United States. Additionally, bank units must not implement any letter of credit or process any other document if it uses the term blacklist or boycott or if its implementation or processing would constitute boycott participation under United States tax laws. Bank of America general anti-discrimination policy prohibits all bank units from discriminating against any person based on race, religion, sex or national origin. Bank units must not engage in any transaction containing such a condition. Bank of America does not engage in any discriminatory business practices in connection with the Arab League s boycott of Israel. Office of Foreign Assets Control (OFAC) Compliance OFAC administers and enforces economic and trade sanctions based onus foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to proliferation of weapons of mass destruction. OFAC acts under Presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under U.S. jurisdiction. Many of the sanctions are based on United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied countries. OFAC has promulgated regulations to help administer its program. AllU.S. persons and entities, including banks, federal branches and agencies, international banking facilities, and overseas branches, offices and subsidiaries of U.S. banks must comply with the laws and OFAC-issued regulations. In general, these regulations: Require blocking of accounts and other assets of specified countries, entities, and persons. Prohibit unlicensed trade and financial transactions with specified countries, entities, and persons. Bank of America maintains an effective OFAC compliance program, including written policies and procedures for checking transactions for possible OFAC violations, designating associates responsible for day-to-day compliance, establishing and maintaining strong lines of communication between departments of the bank, associate training, and an annual in-depth audit of OFAC compliance. Letters of credit, wire transfers, and non-client transactions such as funds transfers are compared with OFAC lists before being conducted. 34

38 Chapter 03 Import Letters of Credit Defined 20 Most Important Characteristics of an Import Letter of Credit 01. irrevocable This term means that the issuing bank cannot cancel or amend an LC without the consent of the beneficiary. 02. Expiry Date and Issue Date As agreed upon between the buyer and the seller. Commercial import letters of credit generally expire in the country of the beneficiary. 03. Issuing Bank / Advising Bank Needs to be listed. 04. Importer/Exporter Make sure that the full name of your seller and the seller s address, as well as the full name and address of your own company, are correctly stated on the letter of credit application and the letter of credit itself. 05. Value/Currency The amount of your letter of credit should conform to the amount of your sales contract. Make sure that the currency of the amount is accurately indicated on your letter of credit application. 06. Description of Goods/Services We recommend that you employ a very simple merchandise description when applying for a letter of credit. Excessive details may cause discrepancies and delays; if the nature of your sale requires a detailed description of merchandise, it belongs in the sales contract or purchase order agreement between you and your seller. The sales contract number or purchase order agreement can then be quoted in the merchandise description of the letter of credit. 07. Required Documents See Chapter 5, A Closer Look at Letter of Credit Documents. 08. Payment Terms Also known as Tenor. Make sure that payment terms are accurately indicated on your letter of credit application, and correctly quoted in the letter of credit. The payment term At Sight indicates that the bank will pay within a reasonable time after documents have been presented by the beneficiary and found to be in order. If a letter of credit indicates 90-Days Sight, with discount charges for beneficiary s account, you agree to 90-day terms, and you will be debited 90 days after the presentation of the draft and complying documents. If the discount charges are for the buyer s account, payment to the beneficiary will be effected At Sight and the buyer will pay discount charges at the point of negotiation and the face value of the draft at maturity. See Chapter 7 for a complete discussion of usance terms. 09. Incoterms Shipment terms. See IncoTerms, Chapter Port to Port (Dispatch to Destination) Make sure that your letter of credit application correctly states the port of shipment and the port of destination, as indicated in your sales contract. 11. Uniform Customs and Practices, Publication No. 600 Your letter of credit should state that it is subject to the Uniform Customs and Practice for Documentary Credits Publication No. 600 of the International Chamber of Commerce. 12. Who Pays Fees? Unless otherwise stipulated in the letter of credit, all banking charges are for the account of the applicant. If charges are for the beneficiary s account, as specified on the letter credit, they are normally deducted from the face amount of the draft at the time of payment. 13. Latest Shipment Date The latest shipment date should be the same as that agreed to in your sales agreement. If you do not stipulate a latest shipment date in your letter of credit application, it is understood as the same date as the expiry date. 35

39 Chapter 03 Import Letters of Credit Defined 14. Presentation Date or Stipulation The presentation date is usually a stipulation such as Documents must be presented for negotiation within 15 days after the on board date of the ocean bill of lading, and within the validity of the letter of credit. A 21-day presentation stipulation is understood, in the absence of any statement to this effect (see Article 14(c), UCP 600). 15. partial Shipments Allowed/Not Allowed If your letter of credit application does not indicate that partial shipments are prohibited, it is understood that partial shipment is allowed. Make sure that this information agrees with your original sales contract with the seller. 16. transshipment Allowed/Not Allowed If your letter of credit application does not indicate that transshipments are prohibited, it is understood that transshipment is allowed. Make sure that this information agrees with your original sales contract with the seller. Transshipment means that the merchandise is loaded on a carrier that only goes to a certain point, and at that point the merchandise is unloaded and reloaded onto another carrier. 17. reimbursement Instructions Determines when payment will be received by the exporter. Four major types of reimbursement instructions are: a) issuing bank authorizes advising bank to debit their account; b) issuing bank instructs advising bank to claim reimbursement from a third bank (reimbursing bank); c) issuing bank requires advising bank to send them a cable notifying them that documents have been received and found to be in compliance with letter of credit terms, after which issuing bank remits funds to advising bank; and d) issuing bank requires advising bank to send documents to them for payment (slowest method of payment). 18. Availability Your letter of credit is either freely negotiable or straight. A freely negotiable LC will indicate that it is available with any bank by sight payment, by deferred payment, by acceptance or by negotiation. A negotiating bank may play various roles pursuant to the latitude extended by the letter of credit, but it normally is allowed to take the documents in charge and pay the beneficiary against funds received from the issuing bank. A straight, or restricted, LC will indicate that it is available with (named bank) by sight payment, by deferred payment, by acceptance or by negotiation. The beneficiary must present documents at the counters of the named bank. 19. Confirming Bank For all intents and purposes, beneficiaries normally present their documents to the confirming bank and regard it as the primary source of payment. A confirming bank is obligated to pay against compliant documents, regardless of whether or not funds are received from any reimbursement source. 20. Reimbursing Bank The reimbursing bank is usually named under the Special Instructions portion of a letter of credit, or in field :78: of a S.W.I.F.T. 700 message. 36

40 Chapter 03 Import Letters of Credit Defined Understand and Control Your Import Letters of Credit What can an importer do to make sure that the letter of credit process works for him? As an importer, you should strive to exercise control over this process. That s why it s so important to understand the process and to establish a written contract or sales agreement with your seller before you apply to your bank (the issuing bank) for a letter of credit. Your contract, sales agreement or purchase order should contain all the conditions that are necessary to be included in the letter of credit. When your bank issues a new letter of credit on your behalf, it will normally provide you with a copy of the letter of credit. Always read the letter of credit thoroughly. If any parts of your letter of credit are not clear to you or do not seem to agree with your letter of credit application and/or sales contract and/or purchase order, contact your local Bank of America Global Trade Operations representative. Also make sure that you understand any additional wording that Bank of America has added to the letter of credit as we issue it.we are giving additional instructions directly to the advising bank in most cases, but you should understand the meaning of these instructions. Normally your seller should not ship merchandise until your letter of credit has been issued by your bank. You may, however, ask your bank to issue a preliminary advice of the letter of credit to your beneficiary. This process will provide you and your seller with a letter of credit number for tracking purposes, and will give your seller the reassurance needed before shipping merchandise. 37

41 Chapter 03 Import Letters of Credit Defined Opening a Commercial Letter of Credit Your bank looks at an import letter of credit line in much the same manner as any loan request. Careful evaluation is made of your ability to reimburse Bank of America when drafts drawn under the letter of credit are presented or when time drafts (acceptances) mature. Furthermore, a review of the importer s overall credit strength is required when it is anticipated that loans will have to be made to finance the payment of the draft. As with any type of commercial loan, the bank obtains appropriate borrowing authorization, resolutions, guarantees, etc. from the client. To get started, discuss your trade finance business with your Bank of America Global Trade & Supply Chain Solutions representative and determine the product that best suits your credit needs. Our bankers also understand that your financial needs change as your business grows from basic to fully integrated services. Tell us about your changing needs and let us help you prepare for your financial future. You will then complete an application and submit it to your banker. The application should be typed or neatly printed, signed and accompanied by any required documents. Please note that we reserve the right to change the Application and Agreement for Commercial Letter of Credit form when we deem appropriate. Bank fees related to issuing and negotiation of import letters of credit are related to the cost, risk and time involved. As with all major banks, charges are also levied for incidental activities that arise under import letters of credit. Letters of credit are irrevocable and cannot be canceled prior to the expiration date without the written consent of the beneficiary. After issuance, cancellation or other changes may only be effected by an amendment submitted to Bank of America and with the agreement of the beneficiary. A copy a Bank of America Commercial Letter of Credit Application is provided here, along with an explanation of each of the fields on the application. 38

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45 Chapter 03 Import Letters of Credit Defined Understanding the Commercial Letter of Credit Application Commercial Letter of Credit Application 01. applicant Enter your legal name exactly as it appears on your preapproved line of credit or application for credit. 02. full text teletransmission /Courier Bank of America will send the issued letter of credit to an advising bank in the country of the beneficiary using the method that you choose. When full text teletransmission is chosen, Bank of America normally sends the letter of credit via S.W.I.F.T. to the advising bank for forwarding to the beneficiary. Letters of credit can also be sent by a brief teletransmission advice, followed by full details by airmail or courier. This same advising bank must be used when making an amendment to the letter of credit. 03. advising Bank Enter the name of the bank the beneficiary wishes to use to advise the letter of credit. If no specific bank has been requested, leave this blank. Bank of America will send the letter of credit to a branch of Bank of America or a correspondent bank in the beneficiary s country to deliver the letter of credit to the beneficiary. The only responsibility of the advising bank is to take reasonable care to check the apparent authenticity of the letter of credit that it advises, thoroughly test key arrangements, and then mail or deliver it to the beneficiary. In addition, advising banks might be nominated or requested to negotiate credits but have no obligation to do so. 04. for Account Of Use this box if you want the letter of credit to be issued on behalf of an entity other than the applicant. Otherwise, leave blank. 05. in Favor Of Enter the name and address of the beneficiary. The beneficiary is the party from which you are buying the merchandise. This is the party entitled to be drawn under the letter of credit and the party that will receive payment upon presentation of documents that comply with the terms of the letter of credit. 06. expiration Date Enter the date the letter of credit is to expire. Be sure to allow plenty of time for the beneficiary to make the shipment and present the documents required by the letter of credit. The expiration date cannot be later than the date your available credit expires. Letters of credit typically expire at the offices of an advising or negotiating bank in the beneficiary s country. To allow time for any drawing to reach us, collateral is generally held for 30 days after the expiration date. If the letter of credit expires at our counters, the collateral is generally held for ten working days. This allows for documents that may still be in transit to reach us. 07. amount Enter the amount of the letter of credit in figures followed by the amount in words. Enter the name of the currency. If blank, the currency will be assumed as U.S. dollars. However, your beneficiary may require the letter of credit to be paid in a major foreign currency such as the Euro, Japanese Yen or British Pounds Sterling. If the letter of credit is issued in a foreign currency, you undertake the exchange rate fluctuation risk, and additional credit approval will be required. 08. covering Letters of credit are usually issued for 100% of the amount of the invoice. They can be issued for less than the full amount of the invoice if, for example, you have made an advance payment to the beneficiary. 09. available By Drafts At (Tenor) The draft is the document that represents the demand for payment that the beneficiary makes on the bank. Most letters of credit call for drafts at Sight, where the beneficiary is paid 42

46 Chapter 03 Import Letters of Credit Defined at the time documents are received and found to be in compliance with the terms of the letter of credit. If, on the other hand, the beneficiary and bank have agreed to give you payment terms, the letter of credit will call for drafts payable at some future time. For example, drafts payable at 90-Days Sight or payable at 45 days after Bill of Lading date. 10. partial shipment Check the appropriate box to indicate whether or not you will allow payment on partial shipments. 11. transshipment Check the box to indicate whether or not you will allow transshipment. Transshipment means that the merchandise is loaded on a carrier that only goes to a certain point and at that point the merchandise is unloaded and reloaded on another carrier. Transshipment should always be permitted on air shipments and combined transport method shipments. It may be prohibited on shipments where direct shipping service between the supplier and you is always available. 12. transferable Letter of Credit Check the box to indicate whether or not you will allow this letter of credit to be transferred by the beneficiary. A transferable letter of credit allows the beneficiary of a letter of credit to make available (transfer) all or part of the proceeds of the letter of credit to a separate party. The parties to whom the letter of credit is transferred acquire the same rights and responsibilities under the letter of credit as the original beneficiary. Transferable letters of credit are typically used when both parties require the protection of the letter of credit and the first beneficiary of the letter of credit is an agent or intermediary procuring goods from another supplier whose identity he does not want to disclose to the buyer. 13. Shipment From To: For shipments where a multi modal document is called for, complete at least fields A and/or D, fields B and C are optional and should be used as applicable to give clear information about the expected movement of the goods. For shipments where an ocean or charter party bill of lading OR an air waybill is called for, complete fields B and C only. For shipments where road, rail or inland waterway documents are called for, complete fields A and D only. 14. merchandise To Be Described in Invoice As Enter a brief description of the merchandise. If your description is too detailed, we may ask you to shorten the description before we issue the letter of credit. A detailed description of the merchandise belongs in the contract between buyer and seller or in purchase order, not in the letter of credit. 15. Shipping Terms/Price Basis Also known as Incoterms, the shipping terms you select should be discussed and agreed to with your supplier in advance of completing the application. The price basis determines which services and related costs, usually freight and insurance, are included in the price, in addition to the cost of the goods themselves. International trade terms used in connection with specific prices should be understood thoroughly by both the buyer and seller (see Incoterms). 16. Documents Required This area contains a number of commonly requested letter of credit documents to demonstrate shipment of the merchandise you ve contracted to buy. The documents you will need from the beneficiary depend upon the contract between you and the beneficiary, the country from which the goods will be shipped, the price basis and, in some cases, the merchandise itself. Your Customs House Broker can give you guidance regarding the documentation you will need from the beneficiary. Refer to Chapter 5 for more information on documents typically required under a letter of credit. commercial Invoice: This is always required. Specify how many originals and how many copies you ll need. 43

47 Chapter 03 Import Letters of Credit Defined packing List: Typically required, it describes the contents that were packed into the containers you ll be receiving. Specify how many originals and how many copies you ll need. Certificate of Origin: Typically required, it certifies where your merchandise originated. Specify how many originals and how many copies you ll need. negotiable Marine/Air Insurance Policy: Check this box if your shipping term includes insurance. Stipulate who is to effect the insurance coverage. Also check the boxes to indicate which risks should be covered by the insurance policy. Transport Documents: Indicate type of transport document and number of originals required based on the expected mode of shipment. Consigned to/the order of: Indicate to whom the merchandise will be consigned, the order of and how the consignment must be endorsed. This is the party that will be able to take possession of the goods. Marked Notify: Specify a party to be notified when the goods arrive for dispatch to the consignee. Marked Freight: Check the box to indicate whether freight is to be covered on a collect or prepaid basis. Other Documents: List any additional documents you expect the exporter to produce. These could include Inspection Certificates and Phytosanitary Certificates, among others. If the shipment is to be made by air, you may wish to require a signed statement from the beneficiary that one set of documents has accompanied the shipment. This will enable you to pick up the merchandise as soon as it arrives. This should be included in Special Instructions. 17. Special Instructions to be Included in the Letter of Credit: When there are additional terms or conditions that are not covered by these documents, you can indicate them here. Bank of America automatically indicates that any banking charges other than ours are to be charged to the beneficiary, unless you indicate otherwise. We may inquire about the purpose of special instructions requested by you, to ensure that they can be complied with. 18. Special Instructions for Bank of America: Use this area to tell us who we should call with any questions about your application and who to contact if there are discrepancies in the documents presented. 19. Documents must be presented to the negotiating or payment bank no later than: This is the amount of time the seller has to obtain, complete and present all documents required under the letter of credit for payment. If this space is left blank, the shipper may take up to 21 days to present documents, not to exceed the expiry date of the letter of credit. Steamship companies normally require an original bill of lading to release merchandise. If you allow the shipper too many days to present documents, the ship may arrive at the destination port in advance of the documents. The merchandise will then be placed in storage by the steamship company and will accrue demurrage charges. The number of days entered here added to the latest shipment date in box No. 12 should arrive at the expiration date in box No. 5. Agreement Following the demonstration copy of the Commercial Letter of Credit Application, you ll find an example of the Agreement from the reverse side of the application. This represents the Agreement between you and Bank of America for the issuance of your letter of credit. Please read it carefully, and complete and sign in accordance with the instructions on the Agreement itself. 44

48 Chapter 03 Import Letters of Credit Defined A Discussion of UCP 600 All commercial letters of credit should be issued subject to a set of rules established by the International Chamber of Commerce, and known officially as The Uniform Customs and Practice for Documentary Credits. The current version is referred to as UCP 600 and went into effect July 1, The following discussion is intended to summarize and clarify the 39 articles that comprise UCP 600. Partial quotes and comments are given in this chapter and should not be interpreted as a full summary. For a complete reading of UCP 600, as well as the URC 522 ( Uniform Rules for Collections ), please refer to the ICC publications, available for purchase on ICC s Website at Art. 1 Art. 2 Art. 3 Art. 4 Art. 5 Application of UCP This article states that all letters of credit, including standbys, are issued subject toucp 600, provided that the LC specifically indicates this to be the case. Great care should be taken to avoid accepting credits that are not issued subject to UCP 600. Please note that standby LCs can also be issued subject to another set of rules issued by the International Chamber of Commerce, the ISP 98. Definitions This article gives 14 definitions relative to this publication. interpretations This article gives 12 interpretations to use within the framework of the rules. credits vs. Contracts A credit by its nature is a separate transaction from the sales or other contract on which it may be based. This article makes a distinct difference between the credit itself and any underlying contract to which the transaction is connected. Banks are not concerned with any underlying contracts, and an applicant cannot prevent a bank from paying on a credit simply because the applicant asserts that the underlying contract has been broken or not fulfilled. There may be various contractual relationships which exist between banks or between the applicant and the issuing bank. Beneficiaries may not avail themselves of such relationships (see Art. 5). Documents vs. Goods/Services/Performance This article clarifies that banks deal only with documents, and not with goods, services or other performances relative to those documents. For example: A credit calls for shipment of 5 blade ceiling fans, and the applicant (buyer) learns that the beneficiary shipped 4 blade ceiling fans. The applicant cannot instruct the bank to deny payment. So long as the documents being submitted describe the goods as 5 blade ceiling fans, the bank is obligated to pay (assuming all other terms and conditions were complied with). Likewise, if a standby credit contains a clause that requires the beneficiary to submit a statement certifying that The applicant is in default under their contract No dated May 15, 2006, then the applicant is precluded from instructing the bank to deny payment simply on the basis that the applicant claims not to be in default. 45

49 Chapter 03 Import Letters of Credit Defined Art. 6 Art. 7 Art. 8 Art. 9 Art. 10 Availability, Expiry Date and Place for Presentation A credit must state the bank with which it is available or whether it is available with any bank. This article gives specific guidance on the various availability structures, expiry conditions and place for presentation of documents. Properly structured, a credit will effectively tie these items to one another. Bank Undertaking A credit is an obligation of the issuing bank to honor, provided that a complying presentation is made. The article outlines the various scenarios which will engage the issuing bank s obligation depending on the availability of the credit. Confirming Bank Undertaking By adding its confirmation to a credit, a bank is obligated to honor provided that a complying presentation is made. The article outlines the various scenarios which will engage the confirming bank s obligation depending on the availability of the credit. advising A credit may be advised to a beneficiary through another bank without engagement on the part of that bank. This bank may act in the role of either an advising bank or as a confirming bank. The advising bank s responsibility is limited to taking reasonable care to ensure the authenticity of the credit and the accuracy of the credit as it is passed to the beneficiary. If it is unable to verify authenticity, it must notify the issuing bank right away. Should the advising bank choose to advise an unauthenticated credit, they must so indicate this on their cover letter to the beneficiary. This responsibility on the part of an advising bank is very important. Unfortunately, there have been numerous documented cases of bogus letters of credit being issued, and then advised or confirmed by yet another bogus bank in the beneficiary s country. This is just one good reason to arrange for letters of credit to be advised/confirmed by the beneficiary s bank whenever possible. amendments A credit cannot be amended or cancelled without the agreement of the issuing bank, the confirming bank (if any), and the beneficiary. The only minor exception is covered under transferable credits, Article. An issuing bank is bound by any amendments as soon as it has issued them. A confirming bank is likewise bound from the moment that it extends its confirmation to any amendment. However, a confirming bank may decline to extend its confirmation to an amendment, and, if it does so, it must inform the issuing bank and the beneficiary without delay. An amendment does not become effective until the beneficiary accepts the amendment. Acceptance may be in writing. If the beneficiary does not accept the amendment in writing but subsequently presents documents that conform to the credit and the not yet accepted amendment, then the amendment is deemed accepted at that time. If the beneficiary wishes to reject the amendment, rejection should be done in writing prior to presenting documents. If there is more than one change covered in the same amendment advice, the beneficiary must accept or reject all changes in that particular amendment. 46

50 Chapter 03 Import Letters of Credit Defined Art. 11 Art. 12 Art. 13 Teletransmitted and Pre-Advised Credits Credits sent by an issuing bank to an advising bank via a teletransmission are considered the operative instrument and no confirmation is expected to follow. nomination An authorization to honor or negotiate does not impose any obligation on that nominated bank. This article describes the options of a bank who has been nominated to honor or negotiate. It is also the article that authorizes a nominated bank that has accepted a draft or incurred a deferred payment undertaking to prepay or purchase that undertaking from the beneficiary. Lastly, this article makes it clear that the act of receiving, examining and forwarding documents does not constitute honor or negotiation. Bank-to-Bank Reimbursement Arrangements This article only applies to those credits which arrange for bank-to-bank reimbursement where the letter of credit does NOT indicate that the reimbursement is subject to URR 525 (ICC Rules for Bank-to-Bank Reimbursements). When an issuing bank opens a letter of credit that is available with a bank other than itself, the issuing bank will frequently indicate the name of a reimbursing bank. The issuing bank maintains an account with the reimbursing bank and authorizes them to honor reimbursement claim(s) from the nominated bank that has acted in accordance with its nomination under the credit. This article simply states that the issuing bank must provide authorization instructions to the reimbursing bank in a timely manner. The bank that requests reimbursement is called the claiming bank. A claiming bank shall not be required to supply a certificate of compliance with the terms and conditions to the reimbursing bank. If the reimbursing bank fails to pay the claiming bank, then the issuing bank is still obligated to pay the claiming bank provided that all terms and conditions of the credit have been complied with. The issuing bank shall be responsible to the claiming bank for any loss of interest if reimbursement is not provided by the reimbursing bank on first demand, or as otherwise specified in the credit or mutually agreed, as the case may be. The reimbursing bank s charges are to be paid by the issuing bank unless specified for the account of the beneficiary. If so specified, the reimbursing bank s charges will be deducted from the payment to the claiming bank. In the event that the credit is not drawn under the reimbursing bank, charges remain for the account of the issuing bank. 47

51 Chapter 03 Import Letters of Credit Defined Art. 14 Art. 15 Standard for Examination of Documents This article gives exporters a clear idea of how banks will perform the examination of their documents and sets a strong foundation for how to prepare complying documents. It deals with the following topics: Banks must determine compliance on the basis of documents. Each bank that has a specific duty in the LC (issuing bank, confirming bank, nominated bank that is acting on its nomination) has a maximum of five banking days following the day of presentation to examine the documents and determine compliance. A presentation must be made no later than 21 days after the goods have been shipped, but in no case later than the expiry date of the credit. example: An LC is issued with an expiry date of Saturday, August 25, 2007, but does not stipulate a latest shipping date. Documents could be presented as late as Monday, August 27, 2007; however, the latest shipping date could be no later than Saturday, August 25, Note: Sometimes documents are presented on or before the expiry date or latest day for presentation, and are subsequently found to contain discrepancies. On occasion, the beneficiary must re-present corrected documents. If the corrected documents are submitted after the expiry date or latest day for presentation then a new discrepancy will exist of LC expired or late presentation. For this reason it is highly advisable to present documents at least seven days prior to the expiry date of the credit. The data content in any required document in the presentation must not conflict with data The description of goods in documents other than the commercial invoice may be in general terms. Except for the transport document, commercial invoice and insurance document (if any), unless the credit stipulates otherwise, banks will accept documents as presented if the content appears to fulfill the function of the required document. Documents presented that are not required by the credit will be disregarded and likely will be returned to the presenter. If a credit speaks to a condition and does not indicate which document would contain information to show compliance, that condition will be disregarded. Information such as beneficiary and applicant addresses and contact details and the named shipper or consignor on any document may vary from that shown in the credit. Complying Presentation This article describes the actions around negotiation, honor and forwarding of documents required of a bank when a presentation is found to be in compliance. 48

52 Chapter 03 Import Letters of Credit Defined Art. 16 Art. 17 Art. 18 Art. 19 Art. 20 Discrepant Documents, Waiver and Notice This article describes the actions permitted or required of a bank when a presentation does not comply. The bank may refuse to negotiate or honor. The issuing bank may approach the applicant for waiver of discrepancies. The bank deciding to refuse must give a single notice to the presenter, by expeditious means, by the close of the 5th banking day after presentation that includes: A statement of refusal A listing of each discrepancy A notice of how the documents will be handled If the bank fails in any of these responsibilities they shall be precluded from claiming that the documents do not comply. Original Document and Copies This article explains the issues around original vs. copy documents: At least one(1) original of each document called for in a credit must be presented. Guidelines are described regarding how to determine if a document is an original for the purposes of these rules. Commercial Invoice This article describes the basic features of a compliant commercial invoice. It is important to note that the requirement for merchandise description has a higher threshold for compliance than that for other documents must correspond with that appearing in the credit. Transport Document Covering at Least Two Different Modes of Transport This article describes the required characteristics for the transport document we often call the multimodal or combined transport document. Here you will find information on: Signature requirements Shipment or dispatch information Logistic information Terms of carriage Transshipment information Bill of Lading This article describes the basic required characteristics for the transport document often referred to as a Marine or Ocean Bill of Lading (B/L) and that indicates a port-to-port shipment. Here you will find information on: Signature requirements Shipment or dispatch information Logistic information Terms of carriage Transshipment information 49

53 Chapter 03 Import Letters of Credit Defined Art. 21 Art. 22 Art. 23 Art. 24 Non-Negotiable Sea Waybill This article describes the basic required characteristics of the document often referred to by its shorter name sea waybill. This document must not be confused with the non-negotiable copy of a bill of lading or multimodal transport document nor with a bill of lading or multimodal transport document that has been issued in straight or non-negotiable form. In the article you will find information on: Signature requirements Shipment or dispatch information Logistic information Terms of carriage Transshipment information Charter Party Bill of Lading This article describes the basic required characteristics of this private agreement transport document the bill of lading that is subject to a charter party contract. In the article you will find information on: Signature requirements Shipment or dispatch information Logistic information Transport Document This article describes the basic required characteristics of the document often referred to as an air waybill (AWB). In the article you will find information on: Signature requirements Shipment or dispatch information Logistic information Terms of carriage Transshipment information Road, Rail or Inland Waterway Transport Document This article describes several transport documents where, for the purposes of letters of credit, the basic required characteristics are similar. You might see the documents referred to as (including but not limited to): Truck/ Road - Bill of Lading or Waybill Rail Bill of Lading or Waybill Barge Waybill In this article you will find information on: Signature requirements Shipment or dispatch information Logistic information Transshipment information 50

54 Chapter 03 Import Letters of Credit Defined Art. 25 Art. 26 Art. 27 Art. 28 Art. 29 Courier Receipt, Post Receipt or Certificate of Posting This article describes the basic required characteristics for transport documents that indicate shipment of goods by courier or postal services. In this article you will find information on: Signature requirements Shipment or dispatch information Logistic information On Deck, Shipper s Load and Count, Said by Shipper to Contain and Charges Additional to Freight This article describes certain wording that typically is found on transport documents and details how banks will deal with this circumstance. Clean Transport Document This article provides a rule that says that bank will accept only clean transport documents and what constitutes a transport document that is not clean. The word clean need not appear on the document. Insurance Document and Coverage Insurance documents come into play when the shipment requires the seller to provide proof that the goods have been insured as they move from seller to buyer. This article gives an overview of what basic requirements must be met when an insurance document is required and conditions for certain characteristics. Insurance document types Signature requirements Dates of coverage Logistics covered Value of coverage Risks covered Exclusions and deductibles Extension of Expiry; Last Date or Day for Presentation Control of the critical dates in a credit is one of responsibilities of the beneficiary that will help ensure they retain the protection of the credit. This article gives the beneficiary the right tomake their presentation on the banking day following the latest day for presentation, whether that is tied to a shipping date or is actually the expiry date of the credit. 51

55 Chapter 03 Import Letters of Credit Defined Art. 30 Tolerance in Credit Amount, Quantity and Unit Prices This article provides for tools within the credit that create allowances often necessary with regard to the details of amount, quantity and unit prices, while also providing for protection of unit prices where necessary. This is a very useful article in helping credits adapt to the needs of the buyer and seller when exact values are undetermined until goods are actually shipped. Allowances in Credit Amount, Quantity and Unit Price Sometimes an LC will refer to the amount or the quantity as about, or approximately. When this happens, the amount or quantity may be up to 10%more or less than the amount or quantity (including unit prices) stated in the credit. Banks will accept documents which show that the quantity of goods being shipped has a variance of 5%more or less than that stipulated in the credit unless it would cause the amount of the drawing to exceed the available balance under the credit, or the credit states the quantity in terms of a stipulated number of packing units. Example: LC calls for 5,000 gallons of orange juice valued at $100,000.Unless specifically prohibited in the credit, banks will accept documents showing the amount of product within a range of 4,750 gallons up to 5,250 gallons. Note: The amount being drawn could be reduced to $95,000 (for 4,750 gallons), but could not exceed $100,000 even though between 5,000 and 5,250 gallons were shipped. Example: LC calls for 5,000 cartons of orange juice. Banks will reject documents which indicate a shipment of either less than or more than 5,000 cartons. (Exception: Banks will accept documents for less than 5,000 cartons if the credit allows for partial shipments). UNLESS a credit stipulates otherwise, or unless Article 30 (a) or (b) applies, banks will accept documents with an amount up to 5% less than the amount of the credit. However, if the credit calls for a specific quantity or unit price, then the full quantity must be shipped and the unit price must not be reduced. Example: LC calls for a shipment of 5,000 cartons of orange juice totaling $100,000. Partial shipments are prohibited. Banks will accept documents totaling between $95,000 and $100,000 provided that the invoices still indicate that 5,000 cartons have been shipped. Art. 31 Partial Drawings or Shipments While the standard credit makes no restrictions around partial shipments and/or partial drawings, credits can and often do restrict partial shipments and/or drawings. This article helps all parties concerned understand what constitutes a partial shipment in order to control partial shipment restrictions. Art. 32 Installment Drawings or Shipments Some credits contain conditions for required installment drawings and/or shipments. This article tells us that if any such installments are not drawn or shipped according to the time requirements in the credit, the credit CEASES to be available for that and any further drawings. 52

56 Chapter 03 Import Letters of Credit Defined Art. 33 Art. 34 Art. 35 Art. 36 Art. 37 Art. 38 Hours of Presentation Banks have no obligation to be available to take in presentations outside of normal business hours (see Article 2 for definition of banking days). Disclaimer on Effectiveness of Documents This article establishes that, while banks deal in documents only with regard to the transaction covered by the LC, they do not have any responsibility to go outside of those documents to establish their genuineness or accuracy or descriptions therein, etc. Disclaimer on Transmission and Translation This article establishes that banks are not responsible for consequences of loss in transit or mutilation of documents arising out of transmission or delivery. Force Majeure This article relieves banks of responsibility for consequences arising during force majeure events. Disclaimer for Acts of an Instructed Party This article covers a few separate issues related to the use of another bank s services to complete the work needed to process the letter of credit. Banks often will utilize the services of another bank to effect instructions given by the applicant. This is done so at the applicant s risk. Neither the issuing bank nor the advising bank assumes responsibility should instructions it transmits to another bank not be fulfilled, even if the bank was at their choice. A bank performing services at the request of an instructing bank is entitled to claim their charges from the instructing bank; if the credit states that the charges are for account of the beneficiary and these charges cannot be collected from them, the instructing bank remains liable for these charges. Transferable Credits A credit may be issued allowing for transfer by the issuing bank or by a bank nominated in the credit. This article describes the governing rules for the transfer process. A bank is not obligated to transfer even though the LC states it is transferable Transferable credit is defined Transferring bank is defined Charges for transfer must be paid by the beneficiary Transfer in whole or in part How to handle amendments More than one second beneficiary Terms that may be changes as the transfer is made Substitution of invoice and draft by the first beneficiary; failure to substitute when demanded Second beneficiary presentation of documents must be made to the transferring bank 53

57 Chapter 03 Import Letters of Credit Defined Art. 39 Assignment of Proceeds The beneficiary may instruct that the proceeds (some or all) of a credit be paid to another party. Local law governs such transactions. This paraphrased version of the UCP 600 is intended to summarize and clarify its articles only, and is not to be construed as the entire document. Partial quotes are made in this section. Bank of America assumes no liability for any misunderstanding arising from the use of this condensed version. For a complete reading of UCP 600, URC 522, ISP98 and ISBP, please refer to the ICC publications available for purchase on ICC s Web site at iccbooksusa.com. 54

58 Chapter 03 Import Letters of Credit Defined A Discussion of the eucp (Reference to UCP 500 can be carried over to UCP 600) As an importer, you are probably aware that digital developments are shrinking the world and creating new opportunities for your success in the global marketplace. New technologies can help increase cash flow, strengthen supply chain relationships and streamline your trade activity. With a basic understanding of these new guidelines for electronic document presentment (eucp), you can start to consider how digital developments will affect the future of your organization. The International Chamber of Commerce s rules governing documentary credits now include an electronic supplement that caters to the growing number of documents that are presented electronically. The eucp came into force on March 31, 2002 and was updated in July 2007 to bring it current with the UCP 600. It is now titled eucp 1.1. The eucp, several pages in length, covers items such as the relationship of the eucp to UCP 600, electronic formats for electronic documents, amendments, place of presentation and notice of dishonor and preclusion. These new articles supplement the UCP 600 rules and in no way replace them; they are to be used in conjunction with the UCP 600. The eucp provisions shall prevail to the extent that they would produce a result different from the application of the UCP 600. Parties wishing to use the eucp will specifically have to incorporate it into the credit. However, a credit subject to the eucp is also subject to the UCP without express incorporation of the UCP. The eucp contains a number of definitions of terms that have totally different meanings in the electronic and paper based contexts. Terms such as appears on its face, place for presentation, and sign all common features of the UCP are redefined to take an electronic environment into account. The full-text publication of the eucp can be ordered from the International Chamber of Commerce at At Bank of America we constantly evaluate new technology and consider future partnerships. Our e-solutions are scalable, interoperable and are designed with the client in mind. Because we are not locked in to a single solution and a single vendor, we can provide sound recommendations to help you manage increased volumes and complexity and expand your global trade opportunities. General statements from the eucp Working Group ICC Banking Commission March 2002 The Working Group concluded that its task is to create a supplement to the UCP that will deal with the issues of electronic presentation. The official name for the work is UCP Supplement for Electronic Presentation. It uses the acronym eucp. The eucp provides definitions to allow current UCP terminology to accommodate the presentation of the equivalent of paper documents electronically and to provide necessary rules to allow the UCP and the eucp to work together. The eucp has been written to allow for presentation completely electronically or to allow for a mixture of paper documents and electronic presentation. While practice in this area is evolving, the Working Group believes that providing exclusively for electronic presentation is not entirely realistic, nor will it promote the transition to total electronic presentation. 55

59 Chapter 03 Import Letters of Credit Defined The Working Group has not seen the need to address any issues relating to the issuance or advice of credits electronically, since current market practice and theucp have long allowed for credits to be issued and advised electronically. It is important for the reader of the eucp to understand that many of the articles of the UCP are not affected by the presentation of the electronic equivalent of paper documents and do not require any changes to accommodate electronic presentation. When read together, the UCP and the eucp will provide the necessary rules to allow for electronic presentation and are broad enough to allow for developing practice in this area. Where specific words or phrases used in the UCP are defined in the eucp, these definitions, unless otherwise stated, apply wherever the terms appear in the UCP. The Working Group, in drafting the eucp, has reviewed and considered definitions used in other ICC documents as well as rules and regulations promulgated by governmental and international bodies. These definitions have been used or partially used to the extent possible. Because the business is evolving, it is necessary in many cases to modify these definitions or to create new definitions specifically to address the unique requirements related to the presentation of the electronic equivalents of paper documents under the UCP. The eucp is specific to UCP 500 and, if necessary, may need to be revised as technologies develop, perhaps prior to the next revision of the UCP. For that purpose, the eucp is issued in version numbers that will allow for a revision and subsequent version if the need arises. The eucp has been specifically drafted to be independent of specific technologies and developing electronic commerce systems. That is, it does not address specific technologies or systems necessary to facilitate electronic presentation. These technologies are evolving and it is left to the specific parties to agree on the technology or systems to be used to provide for presentation of electronic records in compliance with the requirements of the eucp. The eucp has been created to anticipate the needs of the market for the presentation of electronic documents. The market, as it is developing, has created a higher standard in anticipation of increased processing efficiencies when the electronic equivalents of paper documents are presented. In anticipation of this demand and to meet the market expectation, several changes to the standards established by the UCP have been deemed necessary when an entirely electronic presentation occurs. These changes are consistent with current practice and the expectations of the marketplace. In order to avoid confusion between the articles of the UCP and the eucp, the articles of the eucp are numbered with an e preceding each article number. 56

60 Chapter 03 Import Letters of Credit Defined S.W.I.F.T. Samples and Comments on Specific Fields This sample is for illustration purposes only. The letter of credit is presented in S.W.I.F.T. (Society for Worldwide Interbank Financial Telecommunication) format which is commonly used by major international banks to transmit letters of credit and other messages. S.W.I.F.T. messages are authenticated, between banks, by the exchange of an electronic key. SAMPLE OF A LETTER OF CREDIT ISSUED BY BANK OF AMERICA SENDER: BANK OF AMERICA TRADE OPERATIONS CENTER 1000 WEST TEMPLE STREET LOS ANGELES, CALIFORNIA RECEIVER: BANQUE AVISANT PARIS, FRANCE SWIFT AUTHENTICATED MESSAGE ISSUE OF DOCUMENTARY CREDIT (TYPE: 700) :27: SEQUENCE OF TOTAL: 1/1 :40A: FORM OF DOCUMENTARY CREDIT: IRREVOCABLE :20: DOCUMENTARY CREDIT NUMBER: :31C: DATE OF ISSUE: :40E: APPLICABLE RULES: UCPLV :31D: DATE AND PLACE OF EXPIRY: LOS ANGELES, CA :50: APPLICANT: RANDALL COMPUTER, INC. 321 OAK STREET LOS ANGELES, CALIFORNIA :59: BENEFICIARY: PRODUITS ELECTRONIQUES S.A. 15 RUE GEORGES DUMAS PARIS 75009, FRANCE :32B: CURRENCY CODE, AMOUNT: USD 134, :41A: AVAILABLE WITH BY : BANK OF AMERICA TRADE OPERATIONS CENTER 1000 WEST TEMPLE STREET 7TH FLOOR LOS ANGELES, CALIFORNIA

61 Chapter 03 Import Letters of Credit Defined BY ACCEPTANCE :42C: DRAFTS AT : 90 DAYS SIGHT FOR 100 PCT INVOICE VALUE :42A: DRAWEE: BANK OF AMERICA LOS ANGELES, CALIFORNIA :43P: PARTIAL SHIPMENTS: PERMITTED :43T: TRANSSHIPMENT: PERMITTED :44A: PLACE OF TAKING IN CHARGE/DISPATCH FROM/PLACE OF RECEIPT : PARIS, FRANCE :44E: PORT OF LOADING/AIRPORT OF DEPARTURE: LE HAVRE, FRANCE :44F: PORT OF DISCHARGE/AIRPORT OF DESTINATION: LOS ANGELES, CALIFORNIA :44B: PLACE OF FINAL DESTINATION/FOR TRANSPORTATION TO/PLACE OF DELIVERY: FRESNO, CALIFORNIA :44C: LATEST DATE OF SHIPMENT: :45A: DESCRIPTION OF GOODS AND/OR SERVICES: COMPUTER EQUIPMENT ACCORDING TO P.O. NO FCA PARIS, FRANCE :46A: DOCUMENTS REQUIRED: SIGNED COMMERCIAL INVOICE IN ORIGINAL AND TWO COPIES. PACKING LIST IN ORIGINAL AND TWO COPIES. FULL SET OF CLEAN MULTIMODAL TRANSPORT DOCUMENTS CONSIGNED TO THE ORDER OF SHIPPER, BLANK ENDORSED, MARKED FREIGHT COLLECT AND NOTIFY BUYER. :71B: CHARGES: BANKING CHARGES ARE FOR ACCOUNT OF APPLICANT, EXCEPT FOR DOCUMENTARY DISCREPANCY CHARGES, IF ANY, WHICH ARE FOR ACCOUNT OF BENEFICIARY. :48: PERIOD FOR PRESENTATION: DOCUMENTS MUST BE PRESENTED FOR PAYMENT, ACCEPTANCE / NEGOTIATION WITHIN 10 DAYS AFTER THE DATE OF SHIPMENT, BUT WITHIN THE VALIDITY OF THIS CREDIT. :49: CONFIRMATION INSTRUCTIONS: WITHOUT :78: INSTRUCTIONS TO THE PAYING/ACCEPTING/NEGOTIATING BANK: 1) ALL DOCUMENTS MUST BE FORWARDED IN ONE MAILING, VIA COURIER OR EXPRESS MAIL SERVICE, TO BANK OF AMERICA, TRADE OPERATIONS CENTER, 1000 WEST TEMPLE STREET, LOS ANGELES, CALIFORNIA

62 Chapter 03 Import Letters of Credit Defined :72: SENDER TO RECEIVER INFORMATION: PLEASE NOTIFY TO BENEFICIARY UNDER ADVICE TO US ATTN: XYZ SMITH PHONE: (012) FAX: (012) REGARDS The preceding letter of credit example is provided for information and illustration only, and does not convey any engagement or responsibility on the part of Bank of America. The names of the institutions used, except for the name of Bank of America, and the transaction represented herein are fictitious. Any similarity with actual institutions and transactions is unintentional and coincidental. Comments on Specific Fields in Preceding Sample SENDER: ISSUING BANK This is the bank that issues the letter of credit (LC) at the request of their client, the buyer (applicant), in favor of the seller (beneficiary). In the LC sample attached, the issuing bank is Bank of America. RECEIVER: ADVISING BANK This is the bank that receives the LC from the issuing bank. In the LC sample attached, Banque Avisant is the bank that would receive the LC and, consequently, the advising bank. Letters of credit are normally sent by the issuing bank to the beneficiary through an advising bank. The advising bank has the means to verify the authenticity of the LC before forwarding it to the beneficiary. However, the advising bank is not responsible for payment. The responsibility for payment rests with the issuing bank. 40A: FORM OF DOCUMENTARY CREDIT This field should read IRREVOCABLE. It means that the issuing bank cannot cancel the LC prior to its expiration date (31D). Although a letter of credit can be issued as Revocable, it is rarely issued as such since most beneficiaries would not accept a revocable LC. 40E: APPLICABLE RULES This field describes the governing body of law to which the letter of credit is subject with the use of codes. UCPLV, as shown in the example, indicates UCP LATEST VERSION. 31D: DATE AND PLACE OF EXPIRY DATE The expiry date should allow the beneficiary enough time to make the shipment, and present the required documents (46A) to the bank where the LC is available (41A), before the LC expires. PLACE The place where the LC expires should be the same as the location of the bank where the LC is available (41A). If the LC states that it is available With Any Bank, the expiry place would be the country of the beneficiary. Both the place where the LC expires and the place where the LC is available to the beneficiary should be where the beneficiary is located, or where it would be reasonably convenient for the beneficiary to present documents. In the sample attached, the LC expires in Los Angeles, California. 59

63 Chapter 03 Import Letters of Credit Defined 50: APPLICANT This is the party, usually the buyer, on whose behalf the LC is issued. In the sample attached, the applicant is Randall Computer, Inc. On an LC issued on your behalf, check to ensure that your name and address are correct. Any difference between the information in the LC and the information in presented documents may be considered a discrepancy. 59: BENEFICIARY This is the party, usually the seller, in whose favor the LC is issued. In the sample attached, the beneficiary is Produits Electroniques S.A. 32B: CURRENCY CODE, AMOUNT The amount specified in the LC should be sufficient to cover the cost of the merchandise, plus any other expenses to be incurred by the seller. The expenses may include freight, insurance, and other charges. In the LC sample attached, the shipment is to bemade FCA Paris, France (44A). The costs to the seller extend only to the point of taking in charge of the merchandise. With an FCA shipment, the buyer assumes the costs of freight and insurance to destination. Besides specifying the amount of the LC, this field will also specify the currency in which the LC is payable. In the sample attached, the LC has been issued inu.s. Dollars. If the LC amount is stated in a foreign currency, you bear the risk of exchange rate fluctuations. 41A: AVAILABLE WITH... BY... This field identifies the bank with which the credit is available (the place for presentation) and an indication of how the credit is available. WITH The LC should name a specific bank where the presentation of the document under the letter of credit must be made (46A). Alternatively, the LC may state that it is available With Any Bank, thus allowing the beneficiary to present documents at any bank of their choice. For practical purposes, however, if the LC states that it is available With Any Bank, the beneficiary would want to present documents at a bank that is involved in the LC transaction, such as the advising bank. If the LC is restricted to the issuing bank, or names a bank outside of the beneficiary s area as the bank where the LC is available, payment may be delayed. In the sample attached, the LC is available to the beneficiary with Bank of America, Los Angeles, California. BY All LCs must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance, or by negotiation. In the sample attached, the LC is available by acceptance because it requires the beneficiary to present a time draft, payable at 90-days sight (42C). After the beneficiary presents the draft and required documents to Bank of America, and Bank of America has determined that the draft and documents are in compliance with the terms of the LC, Bank of America would accept to pay the beneficiary 90 days later. Hence, the LC is available by acceptance. 42C: DRAFTS AT... A draft is the document that represents the demand for payment that the beneficiary makes under the LC. A draft may be payable at sight, meaning at the time when it is presented for payment, or it may be payable at some future time after being presented for payment. In the sample attached, the LC requires drafts payable at 90 days sight. The time when payment is to be made to the beneficiary is usually determined between buyer and seller. If the seller gives payment terms to the buyer, or if the buyer requires bank financing of the merchandise, the LC would require the beneficiary to present a time draft. For further information on drafts, please refer to the section Banker s Acceptances in the accompanying material. 60

64 Chapter 03 Import Letters of Credit Defined NOTE: The issuing bank may not always require presentation of a draft. If payment under the LC is to be made at some future time, and no draft is required, the LC is referred to as a Deferred Payment Letter of Credit. Under this type of LC, since no draft is required, the beneficiary does not have the option of having a draft discounted, that is, of obtaining payment prior to maturity at an advantageous interest rate. 42A: DRAWEE This is the bank on whom the beneficiary is instructed to draw the drafts. An LC may require the beneficiary to draw drafts on the issuing bank, on the advising or confirming bank, or on the reimbursing bank (53A). In the sample attached, the LC requires drafts to be drawn on Bank of America, Los Angeles, California, the issuing bank. 43P: PARTIAL SHIPMENTS Partial shipments may or may not be permitted, or may be permitted within a stated schedule. The beneficiary should make sure that he can meet the shipping requirements. 43T: TRANSSHIPMENT This term means that the merchandise is loaded and reloaded from one carrier to another during the course of carriage. When a shipment is made by air or by combined transport, transshipment should be permitted. In the LC sample attached, transshipment is permitted. :44A: PLACE OF TAKING IN CHARGE/DISPATCH FROM/PLACE OF RECEIPT : This field is commonly used when a multimodal bill of lading is required. It describes the inland point of taking in charge, dispatch from or initial place of receipt of the merchandise, for onward travel. :44E: PORT OF LOADING/AIRPORT OF DEPARTURE: This field describes the port of loading or airport of departure of the merchandise shipment. :44F: PORT OF DISCHARGE/AIRPORT OF DESTINATION: This field describes the port of discharge or airport of destination of the merchandise shipment. :44B: PLACE OF FINAL DESTINATION/FOR TRANSPORTATION TO/PLACE OF DELIVERY: This field is commonly used when a multimodal bill of lading is required. It describes the inland place of final destination or place of delivery of the merchandise. General comments about fields 44A, 44E, 44F and 44B: depending on the type of transport document required under a letter of credit and the shipment terms (Incoterms), either all or some of these fields may be included in the S.W.I.F.T. 700 message. 44C: LATEST DATE OF SHIPMENT Dates are very important in the LC. The latest date of shipment specified in this field should allow enough time for the beneficiary to be able to meet the shipment deadline. 45A: DESCRIPTION OF GOODS AND/OR SERVICES The merchandise description in the LC must be brief. Specific details can be included in the purchase order or sales contract, but have no place in the LC. If an LC contains excessive details in the description of the merchandise, or in the terms of the LC, the advising bank may decline to advise it. Also, complex details in the LC can result in documentary discrepancies. Since the issuing bank could not pay against discrepant documents, the buyer would have the option to refuse payment. Documents presented under an LC containing excessive details may be sent to the issuing bank as presented without review by the bank where the documents are presented. The price basis is usually stated in this field and should be correct. Whether the 61

65 Chapter 03 Import Letters of Credit Defined shipment is to be made FOB port of departure or CIF port of destination, or under any other basis, the price basis stated in the LC should be according to the trade terms specified in the International Chamber of Commerce Publication No. 560, Incoterms Also, the price basis should be reflected in the documentary requirements. In the LC sample attached, the price basis has been stated as FCA Paris, France. Accordingly, under Field 46A, the transport document is to be marked Freight Collect and no insurance document is required. Use of an incorrect price basis, not in conformity with Incoterms 2000, may result in misunderstandings between buyer and seller and a possible delay in payment. For a complete set of the international rules covering trade terms, please refer to the International Chamber of Commerce Publication No. 560, Incoterms A copy can be ordered via the internet at 46A: DOCUMENTS REQUIRED The documents required for payment should be kept to a minimum. When presented, the documents must be in strict compliance with the LC terms. 48: PERIOD FOR PRESENTATION The number of days allowed for presentation of documents after the shipment is made should allow enough time for the beneficiary to receive shipping documents from the carrier or the freight forwarder, and present all documents to the bank where the LC is available, within the validity of the LC. The number of days allowed for presentation of documents should be the difference in the number of days between the latest date of shipment (44C) and the expiry date (31D). In the LC sample attached, the latest date for shipment is November 20 and the expiry date is November 30. Consequently, the number of days allowed for presentation of documents is 10 days. If a letter of credit does not contain a reference to the number of days allowed for presentation of documents, the number of days allowed for presentation defaults to 21 days, per UCP 600, Article 14C. 49: CONFIRMATION INSTRUCTIONS This field indicates whether or not the issuing bank is requesting the advising bank to confirm the LC. The advising bank would only consider confirming an LC at the request of the issuing bank. The beneficiary may ormay not require confirmation of an LC. It would depend on the strength of the issuing bank, the country where the issuing bank is located, and the amount of the transaction. If the seller requires confirmation of the LC, the buyer, in turn, will have to inform the issuing bank, so that the issuing bank will request the advising bank to confirm the LC. If the advising bank agrees to confirm it, the LC would carry the engagement of the advising bank, in addition to the engagement of the issuing bank. When the LC is sent to the beneficiary, the advising bank would notify them if it has confirmed the LC. 78: INSTRUCTIONS TO THE PAYING/ACCEPTING/NEGOTIATING BANK This field is commonly used for the issuing bank to provide instructions concerning the mailing of documents. When used to indicate pre-notification of a reimbursement claim, or that pre-debit notification to the issuance bank is required, the number and type (i.e. banking or calendar) of days within which the issuing bank has to be notified should also be indicated. 62

66 Chapter 04 Purchase Order-to-Pay Service 063

67 Chapter 04 Purchase Order-to-Pay Service For the past 10 to 15 years, importers have invested large sums of money to improve the efficiency of their physical supply chains, moving goods across borders with increased speed and lower costs to meet the demands of an increasingly competitive marketplace. In many instances, the benefits of an efficient physical supply chain have fallen short of expectations because of the failure to link the movement of goods with the movement of money, or with the financial supply chain. Bank of America is committed to developing solutions to assist you in optimizing and integrating your supply chains. Our Purchase Order-to-Pay Service can help reengineer your trading processes and unlock substantial amounts of working capital for you. The Purchase Order-to-Pay (POto Pay) Service is a supply chain finance solution, which links the buyer s supply chain partners into an end-to-end payment and settlement process for increased transparency and visibility throughout the supply chain. The service replaces paper-based functions with electronic processes and broadens settlement options by offering open account payments as well as traditional letters of credit. Through PO to Pay Service, buyers can electronically submit to Bank of America purchase order information that is used to construct letter of credit (LC) and open account payment instruments for delivery to sellers in paper form or via an electronic channel, including Bank of America Direct Trade Services and EDI. The service includes a matching engine, the Purchase Order Processing System (POPS), which reconciles purchase order data submitted by buyers with invoice data submitted by sellers prior to payment. Buyers can also upload a PO file with all of their suppliers PO details to automatically create their LCs and/or OA transactions based on supplier terms and business rules, which streamlines buyers processing steps in their daily work flow. 64

68 Chapter 04 Purchase Order-to-Pay Service Benefits of Purchase Order-to-Pay (PO to Pay) Our PO to Pay service offers you several benefits: Simplified payment process Importers no longer have to manage reconciliation of purchase orders to invoice, packing lists and other shipping documents manually. PO to Pay eliminates these time-consuming tasks by automating your cross-border trade payment process using business-matching rules. It can also handle multiple payment terms and can be integrated with major purchase order and ERP systems that you use today. More certainty and assurance of payment For exporters, the major disadvantage of moving to open account terms is that you lose the payment guarantee offered by letters of credit. With the PO to Pay payment assurance option, subject to credit line availability, your exporters are assured as long as compliant documents are presented to Bank of America. Flexible financing Another concern of exporters who are considering the move to open account is the availability of financing in the absence of a letter of credit. Upon request, your exporters have the ability to receive pre- and post-shipment financing against qualified open account transactions, subject to credit availability. Enhanced security and control Security is a major concern when transmitting financial data electronically. To help you maintain the integrity of your documents, all Web-based services offered by Bank of America have rigorous security standards, including browsers with 128-bit encryption, server-side digital certificates, fire walls and user access controls. How PO to Pay works The importer transmits or uploads a file of purchase orders to Bank of America. Files can be accepted in a variety of formats and can be sent through various electronic channels (Internet or VAN). In the transmitted file, the payment type for each transaction is flagged as either letter of credit or open account. Purchase orders are housed in an electronic database at Bank of America, establishing the conditions a vendor must meet to receive payment. If the transaction is flagged for settlement by letter of credit, purchase order detail is used to issue a traditional letter of credit to the beneficiary. Both letter of credit and open account transactions are available electronically to all trading partners who have been granted access to Bank of America Direct Trade Services, our Web-based trade management system. Data matching and payment feature As goods are manufactured and shipped, vendors present documents to Bank of America for payment. Presentations may be in paper or electronic form or a combination of both. Key data elements in the seller s documents are matched with purchase order data, using an automated mapping engine for electronic presentations or document checkers for paper presentations. If conditions match, payment is made immediately for a letter of credit or open account with the auto-pay feature. Payment for all other open account payment types is made immediately after the importer has given approval. If the matching process fails, discrepancy details are transmitted to the importer for resolution. Once payment is triggered, details can be sent electronically to both the importer and vendor. 65

69 Chapter 04 Purchase Order-to-Pay Service Open account payment types The PO to Pay platform supports three open account payment types: Buyer Approved, No Conditions Matching The purchase orders contain instructions to present documents to Bank of America. When presented, we convert paper documents into a previously agreed-upon electronic format that can be processed automatically by the importer or viewed online via Bank of America Direct Trade Services. The importer matches details to underlying purchase orders and can either approve or reject the transaction for payment. Buyers do not have to submit purchase orders to Bank of America. Buyer Approved, with Conditions Matching The purchase orders are sent to both the seller and Bank of America or only to Bank of America with instructions to advise the open account instrument with purchase order details to the vendor. As export documents are received, Bank of America matches shipment data with purchase order data in accordance with parameters established by the importer. Both compliant and noncompliant presentations are transmitted to the importer for approval to pay. Bank Approved, with Conditions Matching (Auto-Pay) This option is similar to the buyer approved option, except Bank of America automatically pays against transactions where data matches within agreed tolerance limits and based on the availability of funds (straight-through processing). If a match is not established, discrepancy details are transmitted to the importer to be resolved with the seller prior to payment. No matter what option the buyer chooses, Bank of America provides the status of their payments and comprehensive management reports. It pays to have PO to Pay With Bank of America PO to Pay, you improve communication and data exchange with your trading partners and move one step closer to a seamless process that fully synchronizes the movement of goods with the exchange of trading documents, financial data and funds. Call your Global Trade & Supply Chain Solutions representative today to obtain more information about the advantages of our PO-to-Pay Service. 66

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71 Chapter 05 A Closer Look at Letter of Credit Documents What Are Some of the Typical Documents Required in a Letter of Credit? Some of the more commonly required documents include: Commercial Invoice (see Exhibit A) The invoice is a record of the transactions between seller and buyer. It is a request for payment. It is also important to any third party who has an interest in or right to determine the value of a shipment, such as the bank that is asked to discount a draft or the underwriter who is requested to insure the goods. While in some countries the commercial invoice is sufficient for customs purposes, generally a consular invoice or a certificate of origin must be produced for appraisement and entry of goods. When countries accept the commercial invoice as a basis for customs appraisal, they may insist that the description of the goods on the commercial invoice fit the corresponding category or description of their active customs tariff. A number of countries make the sending of the commercial invoice obligatory and require an oath to be signed at the foot of the paper stating that the values shown are entirely in accordance with the facts. The commercial invoice generally gives terms, price, and all details necessary for the proper description of the merchandise as well as the gross amounts and net amounts due. The invoice should be numbered, show the date when it is prepared and the address of the shipper. The price information may include the net unit or total price, and all charges connected with the shipment, including such commissions as may have been agreed upon. In the case of a draft, the interest of the draft could be added, being computed in advance on the basis of the terms of the draft (sight, 30 days, 60 days, and so forth), plus the time it will take for the draft to reach the destination. Other components of the invoice could include: marks and numbers, quantities, number of packages, weights and measurements, tare (when necessary), packed and unpacked, the date of shipment, fax number, and telephone numbers of the seller and/or buyer, per unit, gross costs, etc. Bank commissions and all other charges should also be added to the commercial invoice if the buyer has to pay for them. In cases where the buyer pays for freight, insurance or any other items, these should be added, just the same as consular fees, cartage, lighterage, telecommunication fees, customs fees, and any fees for certificates (such as of health or analysis), provided that the sale makes the buyer liable for any or all of them. Certificate of Origin (See Exhibit B) A certificate of origin certifies that goods were mined, manufactured or assembled within a certain country. A number of countries have apportioned space on the consular invoice to show the country of origin of each item on the invoice, obviating the necessity for a separate certificate. The reasons for requiring such a certificate vary. It is demanded and needed by governments or countries whose tariff laws favor certain countries, or which have made agreements with certain countries, to determine such favored tariff rates. These favorable tariff laws necessitate (for goods brought in from favored countries) a certificate of the actual origin of the articles imported and of the fact that they come from the country or countries enjoying such special tariff privileges or favors. 68

72 Chapter 05 A Closer Look at Letter of Credit Documents The certificate, known as the certificate of origin, therefore enables the importing country to determine, through its customs officers and administration, which shipments or goods shall benefit by such preferences. It contains generally the same information as the consular invoice. This certificate is then presented by the importer to customs officials to show the origin of the goods so that special preferential tariff rates, discounts from regular tariff rates, or other deductions granted in agreements existing between the countries of buyer and seller, or favors, can be taken into consideration. Consular Invoice These invoices may be required by various countries for customs or for statistical or other reasons. They must contain full details and description of the shipment, to be used as evidence of the shipper s owner s declaration of the value of the shipment. They are certified by the consul of the country to which the shipment is destined, and generally include a sworn statement not only as to the truth of the declarations made, but also as to the nonexistence of any other invoice for the same shipment. The consular invoice must show all details of the goods themselves, as well as all discounts, rebates, or the like. The consular certificate or invoice facilitates customs work at destination as well as collection of taxes, and also serves for statistical purposes. The number of copies of the consular invoice which must be presented when a visa is requested will vary considerably with the country and the set-up of its consular and customs offices. The consul always keeps certain copies, partly for his or her own files and partly to be forwarded to the customs officers in the place of destination. The number that are retained depend upon the country. The copies which the consul returns to the shipper are for the exporter to forward to the importer for presentation to customs when the exporter declares the goods. They should arrive as close to the arrival time of the goods as possible (preferably not later than the shipment). Delay in receipt of documents is frequently penalized heavily by the customs department of the importing country. Generally the consular invoice is a copy of the commercial invoice in the language of the importing country, supplied in two to ten copies, which gives full details of the merchandise shipped (see above). The invoice must show also, in addition to information about the materials or merchandise, the name and nationality of the vessel that carries the cargo, the port of shipment, and the port or point of destination. Inspection Certificate An inspection certificate testifies to the inspection of exported or imported goods. If it is needed, this documentary requirement should be clearly stated in quotation and sales contracts. In regard to many staple commodities sold against letters of credit, on grade designation entirely, such as raw cotton, the buyer provides for inspection or warehouse certification of the goods before shipment to avoid loss due to deviation from standard grade. Inspection before shipment is also provided in many sales contracts on expensive machinery or equipment. An inspection from an independent third party may be requested under a letter of credit. 69

73 Chapter 05 A Closer Look at Letter of Credit Documents Insurance Policy or Certificate (see Exhibit C) An insurance policy or certificate should be required for presentment under a letter of credit if the arrangement between buyer and seller indicates that the seller should purchase the insurance. Cargo Insurance serves to protect the shipment of merchandise against loss or damage during transit. Whether or not the buyer or seller is required to purchase insurance for shipped merchandise depends upon the type of transaction specified in the contract or purchase order. For example, if the seller is contracted to deliver merchandise to the buyer FOB (Free On Board), then the buyer/importer is responsible for insuring the goods against risks while in transit. See Chapter 9 of this guide for an in-depth explanation of all shipping terms (Incoterms) and insurance responsibility under each term. Carrier and shipping firms are not required to provide insurance for cargo they are instructed to deliver. Seeking insurance for merchandise is a straightforward process that many merchant insurance firms and freight forwarders will provide. Regular importers frequently use an open cargo policy that provides coverage from warehouse to warehouse, depending upon the terms. This provides automatic coverage for the merchandise throughout the shipping process. These policies usually provide all risk, in addition to warehouse to warehouse coverage, and similar coverage for airfreight and parcel post shipments. Policies for one-time shipments are also available. These are often used by infrequent importers, who arrange these policies with their freight forwarders. With few exceptions (bulk agricultural products and hazardous materials), it is usually preferable for importers to use only warehouse to warehouse or door to door insurance policies for whatever risks are being covered. This assures that all transit points are covered. Insurance costs vary according to the extent of coverage, the risks specified, and any additional coverage requested by the purchaser. Typical coverage for a policy is 110 percent of the CIF (Cost Insurance and Freight) value. This is a common level of coverage, since it is the default level of coverage according to UCP 600. Packing/Weight List (see Exhibit D and E) The list which shows, item by item, the contents of cases or containers with each item listed separately, and its weight and description set forth so as to permit checks by customs on arrival, as well as by the recipient of the goods. It must be accurate and must satisfy both buyer and customs. Bill of Lading (see Exhibits F) The bill of lading is the receipt for the goods received by or loaded on a carrier and the contract between the shipper and the carrier. The contract stipulates where the goods are to be delivered, the freight charges to be paid, when and by whom. This receipt for the merchandise, therefore, whether issued by a steamship company or by other carrier (railway, air carrier, and so forth), represents a definite agreement between shipper and carrier. The conditions of the bills of lading are not uniform and depend upon the nature of the carrier, the conditions and usages at port of shipment or destination, and other individual factors and requirements. The bill of lading may also convey title to the goods to which it refers and can be used to transfer such ownership of the goods with certain exceptions. 70

74 Chapter 05 A Closer Look at Letter of Credit Documents For all these reasons, the carrier or its agent generally will refuse to deliver the goods covered by a negotiable bill of lading without the bill being produced, duly signed or endorsed. Customs considers the holder of a duly signed or endorsed bill of lading to be the owner of all merchandise on such bill of lading issued by a common carrier. The bill itself is regarded as constituting the best evidence of the right to make entry. Some countries require legalization of the bill of lading by their consul at the place or port of shipment to give official proof of the accuracy of the bill as regards to the origin, quantity, and mode of shipment of the merchandise. Ocean Bill of Lading An ocean bill of lading is a receipt for the goods delivered to or on board a vessel, specifying the conditions and terms of carriage, the character of the goods shipped, and their weights, measurements, and destinations, as well as the person to whom the goods are consigned or who is to be notified of their arrival. The bill of lading does not convey title to the goods until it is properly endorsed. It is created by the shipper and must be based on the dock receipt that the steamship line issues on receiving the cargo at the pier, the dock receipt being exchanged for the bill of lading. Usually, three bills of lading are signed, although the various shippers may ask for more unsigned (and therefore not negotiable) copies for different purposes and uses in their offices. For shipments going to certain countries, it is necessary to present the bill of lading for customs along with the other documents; otherwise, it will not be usable at the destination. Ocean bills of lading are issued as straight bills of lading and order bills of lading. The former is a non-negotiable document by which the transportation company acknowledges receipt of cargo and contracts to move it. It is not always necessary to surrender the original copy for delivery of cargo. The order bill of lading is a negotiable document acknowledging receipt of cargo and contracting to move it. Surrender of the original properly endorsed B/L is required on delivery of the cargo. The ocean bills f lading are of two classes, received for shipment and shipped or on board. The former is issued for a named steamer in which space has been previously reserved and goods are in the possession of the steamship company; the latter is issued only after the goods have been loaded on the vessel. Banks often require on board bills of lading when issuing a letter of credit. The ocean bill of lading is not only the final receipt from the carrier, but is a contract between the carrier and shipper. It may be used as a negotiable document. Drafts or bills of exchange to which are attached the shipper s invoice, ocean bill of lading, and insurance policy constitute methods commonly used in making foreign-trade financial settlement. The freight charges generally must be paid before the steamship company surrenders the cargo. Straight Bill of Lading A straight bill of lading is a bill of lading made out to a named consignee. It is not negotiable and is therefore issued for shipments to a specified person. 71

75 Chapter 05 A Closer Look at Letter of Credit Documents Bill of Lading to Order This is a bill of lading made out to the order of, and endorsed by, the shipper either in blank or to a named consignee. The purpose of this type of bill of lading is to protect the shipper against buyers obtaining possession of the goods before they have paid or accepted the relative draft. A steamship company will not deliver goods covered by a to order bill until ownership is proven by presenting the original endorsed bill. However, problems exist in connection with to order bills of lading for Latin American countries, where delivery of incoming cargo is the function of the customs authorities and is not entrusted to steamship lines or their agents. The laws of a few Latin American countries prohibit to order bills of lading, and in some other Latin American countries, these bills are not accorded the same protection as in Europe and the United States. Important Note: In shipping parlance, a distinction is made between a bill of lading made out to the order of the shipper and a bill made out to the order of the buyer. The latter bill does not give shippers as much protection as a bill drawn to their own order. As a rule, when a bill of lading is to the order of a buyer, the buyer can get the goods from a steamship line without presenting the bill of lading by posting a bond. Negotiable Bill of Lading When an order bill of lading is endorsed in blank, it becomes negotiable and the carrier will deliver the goods to whoever presents the endorsed bill of lading. While all original bills of lading (full set) are negotiable, one is sufficient to obtain goods. On the other hand, if bills are drawn to order of the consignee, the consignee s endorsement makes it negotiable. If they are drawn to order of the shipper, the shipper must endorse it before it can be transferred and, therefore, before the goods it represents can be conveyed to a third party. The endorsement itself can be made to a specific third person or firm, a bank, or in blank; while one endorsed copy is sufficient, the full set of originals should be endorsed. In addition to the original endorsed bills of lading, remaining copies generally are kept by the shipper and carrier for their records. Original Bill of Lading This is the original bill of lading, which is negotiable, provided that it is a to order bill. Generally three such originals are issued, known as a full set, with the carrier marking the total number of the originals on each original issued. When negotiating the originals, the bank will require the full set, although one of them, properly endorsed, is sufficient to obtain the goods. If delivery is made against one of the bills of lading, the others are thereby automatically rendered void (see Bill of Lading on p.70). Full Set Bill of Lading When more than one negotiable bill of lading is issued, the number of such total issued is marked on each individual document, and the banks generally insist on receiving the total number of bills issued, or the full set. Extra copies generally are kept by the steamship company and shipper (see Bill of Lading on p.70). Foul Bill of Lading Versus Clean A bill of lading is called foul when, contrary to the clean bill of lading, it shows by marginal notes, rider, or otherwise that all or part of the shipment to which it refers is in bad condition or damaged. 72

76 Chapter 05 A Closer Look at Letter of Credit Documents Multi-Modal Transport Document This is a bill of lading covering shipment on one and the same (straight or to order) bill of lading from point of shipment to port or point of destination, involving transportation by more than one carrier. It is also the term used for a bill of lading issued by a steamer from port of shipment to either an out port or to a point inland in the country of destination, including any transshipment or land carriage necessary to make such delivery. Air Waybill An Air Waybill is similar to an ocean bill of lading, except that it is restricted to shipment by airfreight. A major difference between the two is that the air waybill is always non-negotiable. It is the contract between the shipper and the airfreight carrier, limited to the conditions stated on the air waybill such as the destination and recipient. An air waybill is normally issued in one original, with several copies. 73

77 Chapter 05 A Closer Look at Letter of Credit Documents Exhibit A Sample Copy Only BENEFICIARY: DEMO BENEFICIARY CO. DEMO STREET DEMO CITY HONG KONG, HONG KONG COMMERCIAL INVOICE Date: 10 Jan 2007 Invoice No: SOLD TO: BUYERS INTERNATIONAL 315 PTATANGO MANGO BULILIMAH KTABOROON, CA B/L No: Vessel: Shipped from: Shipped To: JAKARTA, INDONESIA SAN DIEGO, USA Letter of Credit No: Issued By: M NS00178 IMPORTER S ISSUING BANK NAME MERCHANDISE DESCRIPTION: LADIES BLOUSES AS PER PO. NO. NO Additional Information (for this shipment only) ITEM: QUANTITY: PRICE: Certification Statement If Required: Invoice Total: 10, (USD) Authorized Signature: Name: Title: 74

78 Chapter 05 A Closer Look at Letter of Credit Documents Exhibit B Sample Copy Only CERTIFICATE OF ORIGIN EXPORTER: DEMO BENEFICIARY CO. DEMO STREET DEMO CITY HONG KONG, HONG KONG CONSIGNEE: MIZUHO BANK NOTIFY: AIRPORTS AUTHORITY INDONESIA JAKARTA, KASAFDARJUNG AIRPORT, JAKARTA DATE: 10 Jan 2007 OTHER REFERENCES: LC NO: M NS00178 SALES ORDER: INVOICE NO: B/L NO: SOLD TO: BUYERS INTERNATIONAL 315 PTATANGO MANGO BULILIMAH KTABOROON, CA COUNTRY OF ORIGIN OF GOODS: REMARKS: WE CERTIFY THAT THE ORIGIN OF OFTHE GOODS IS THE COUNTRY OF INDONESIA. COVERING: LADIES BLOUSES AS PER PO.NO ITEM NO: DESCRIPTION: ORIGIN: QUANITY: THE UNDERSIGNED HEREBY DECLARE THAT THE ABOVE DETAILS AND STATEMENTS ARE CORRECT PLACE AND DATE: AUTHORIZED SIGNATURE: 75

79 Chapter 05 A Closer Look at Letter of Credit Documents Exhibit C Sample Copy Only ARCH INSURANCE COMPANY A Missouri Corporation Home Office: 3100 Broadway, Suite 511, Kansas City, MO Administrative Office: One Liberty Plaza, 53rd Floor, New York, NY Tel: Certificate of Insurance ORIGINAL Broker: Global Solutions Insurance Services, Inc. Redondo Beach, CA THIS CERTIFICATE REQUIRES ENDORESEMENT IN THE EVENT OF ASSIGNMENT ASSURED POLICY NO. 71-OCP EXPORT REFERENCES CERTIFICATE OF INSURANCE NO UTLIMATE CONSIGNEE and INSURED DESTINATION FORWARDED AGENT / REFERENCES POINT AND COUNTRY OF ORIGIN CA U.S.A NOTIFY PARTY (not applicable to insurance certificate) DOMESTIC ROUTING/EXPORT INSTRUCTIONS (not applicable to insurance certificate) PIER OR AIRPORT LOS ANGELES, CA U.S. PORT EXPORTING CARRIER PRESIDENT TRUMAN 164 AIR/SEA PORT OF EXCHANGE NAHA, OKINAWA, JAPAN PORT OF LOADING ONWARD INLAND ROUTING LOS ANGELES, CA U.S. PORT FOR TRANSHIPMENT TO PARTICULARS FURNISHED BY SHIPPER MARKS AND NUMBERS NO. OF PKGS DESCRIPTION OF PACKAGES AND GOODS& SPECIAL INS CONDITIONS GROSS WEIGHT MEASUREMENTS 124 1x40HC SLAC: PKGS DESCRIPTION OF GOODS AND/SERVICES CONSTRUCTION MATERIALS AND EQUIPMENT CIF NAHA, OKINAWA, JAPAN L K F M L/C: 110 PERCENT OF THE INVOICE VALUE INCLUDING INSTITUTE CARGO CLAUSES (ALL RISKS). INSURANCE CLAIMS TO BE PAYABLE IN JAPAN IN CURRENCY OF DRAFTS. B/L DATE INSURED VALUE $ AMOUNT IN WORDS DOLLARS CONDITIONS OF INSURANCE ON REVERSE SIDE 76

80 Chapter 05 A Closer Look at Letter of Credit Documents Exhibit D Sample Copy Only BENEFICIARY: DEMO BENEFICIARY CO. DEMO STREET DEMO CITY HONG KONG, HONG KONG WEIGHT LIST Date: 10 JAN Jan2007 Invoice No: S.O. No: SOLD TO: BUYERS INTERNATIONAL 315 PTATANGO MANGO BULILIMAH KTABOROON, CA SHIP TO: BUYERS INTERNATIONAL 315 PTATANGO MANGO BULILIMAH KTABOROON, CA Letter of Credit No: M NS00178 Drawn Under: IMPORTER S ISSUING BANK NAME NOTIFY: AIRPORTS AUHTORITY INDONESIA JAKARTA, KASAFDARJUNG AIRPORT, JAKARTA MERCHANDISE DESCRIPTION: LADIES BLOUSES AS PER P.O. PO. NO. NO ITEM: NET WEIGHT: GROSS WEIGHT: We certify this document is true and correct. Authorized Signature: 77

81 Chapter 05 A Closer Look at Letter of Credit Documents Exhibit E Sample Copy Only BENEFICIARY: DEMO BENEFICIARY CO. DEMO STREET DEMO CITY HONG KONG, HONG KONG PACKING LIST Date: 10 Jan 2007 B/L No: Vessel: Shipped From: JAKARTA, INDONESIA Shipped To: SAN DIEGO, USA Invoice No: SOLD TO: BUYERS INTERNATIONAL 315 PTATANGO MANGO BULILIMAH KTABOROON, CA Letter of Credit No: M NS00178 Issued By: IMPORTER S ISSUING BANK NAME MERCHANDISE DESCRIPTION: LADIES BLOUSES AS PER P.O. PO. NO. NO ITEMS: PACKAGES: QUANTITY: NET WEIGHT: GROSS WEIGHT: COMMENTS: PACKING LIST COMMENTS HERE 78

82 Chapter 05 A Closer Look at Letter of Credit Documents Exhibit F Sample Copy Only APL NON-NEGOTIABLE SEA WAYBILL SHIPPER PAGE 1 OF 1 B/L NUMBER APLU EXPORT REFERENCES CONSIGNEE FORWARDED AGENT (References F.M.C. No) J.E. LOWDEN & CO FMC87NF CHB BATTERY STREET SUITE 400 SAN FRANCISCO CA NOTIFY PARTY INTERMEDIATE CONSIGNEE INITIAL CARRIAGE ALSO NOTIFY drop in revised TEL: form PLACE OF RECEIPT POINT AND COUNTRY OF ORIGIN OF GOODS CNTRY: US FAX: NO SED REQUIRED, AES SF EXPORT CARRIER APL BELGIUM 107 PORT OF LOADING OAKLAND PORT OF EXCHANGE KAOHSIUNG PLACE OF DELIVERY KEELUNG Export Valuation PARTICULARS FURNISHED BY SHIPPER Payment by Cheque to be made to the order of APL-Co. ED. Ltd. MARKS & NO.s / CONTAINER NO.S NO. OF PKGS H.M. DESCRIPTION OF PACKAGES AND GOODS GROSS WEIGHT MEASUREMENTS NO M/N FT CY/CY CONTAINER/S SL&C CARTONS FRESH NECTARINES UNDER REFRIGERATION MAINTAIN TEMPERATURE 34 DEGREES F VENT SETTING: 0015 CFM FREIGHT PREPAID NLR CTR NBR SEAL NBR T/S MODE QUANT/TYPE CRLU R40 CY/CY 1440 CTNS SHIPPER S WEIGHT LOAD AND COUNT 43200# 19595K THESE COMMODITIES, TECHNOLOGY OR SOFTWARE WERE EXPORTED FROM THE U.S. IN ACCORDANCE WITH THE EXPORT ADMIN. REGULATIONS. DIVERSION CONTRARY TO U.S. LAW IS PROHIBITED. ON BOARD APL BELGIUM 107 ON AUG.28, 2007 AT OAKLAND B/L TO BE RELEASED AT SERVICE CENTER M OCEAN FREIGHT PAYABLE AT PREPAID U.S. $ COLLECT U.S. $ Local Currency Conditions on Reverse Side TOTAL PREPAID Vessel: Voyager TOTAL COLLECT BL number: APLU This Bill of Lading is governed by and subject to the terms and conditions of APL s Bill of Lading, which may be found on the reverse side of this document or obtained on your Homeport at: or by APL upon request. Date: AUG. 28, 2007 American President Lines, Ltd., The Carrier Place Issued: SERVICE CENTER By: Authorized Signature NON-NEGOTIABLE COPY 79

83 Chapter 05 A Closer Look at Letter of Credit Documents Exhibit G Sample Copy Only Mitsui O.S.K. Lines, Ltd. SHIPPER / IMPORTER BILL OF LADING BOOKING NO A EXPORT REFERENCES NON-NEGOTIABLE (COPY) B/L NUMBER MOLU CONSIGNEE (Not negotiable unless consigned to order ) TO ORDER OF SHIPPER FORWARDING AGENT J.E. LOWDEN & CO 275 BATTERY ST., STE 400 SAN FRANCISCO CA FMC# 0087 CRB# 511B NOTIFY PARTY drop in revised form Also Notify -- Export Instructions for Merchant s Reference Only THESE COMMODITIES, TECHNOLOGY, OR SOFTWARE WERE EXPORTED FROM THE UNITED STATES IN ACCORDANCE WITH THE EXPORT ADMINISTRATION REGULATION. DIVERSION CONTRARY TO U.S. LAW PROHIBITED. Particulars furnished by Shipper PRE-CARRIAGE BY OCEAN VESSEL/VOY. NO. MOL DISCOVERY PORT OF DISCHARGE NAGOYA Container No.; Seal No.; Marks and No.s MCTU / /C4 MOLU / /C4 MOGU / /C4 TRIU / /C4 CAXU / /C4 PLACE OF RECEIPT OAKLAND, CA - CY PORT OF LOADING OAKLAND, CA PLACE OF DELIVERY NAGOYA - CY No. of Containers or Packages Type or Kind of Containers or Packages- Description of Goods SED Not Required - AES SP FREIGHT PREPAID. SHIPPER S LOAD AND COUNT. 5 x 40 HIGH CUBE CONTAINERS SAID TO CONTAIN: 3040 BAGS PERLITE Point and Country of Origin of Goods (for Merchant s Reference Only) UNITED STATES Loading Pier Terminal OAKLAND - TRAPAC PORT Final Destination for Merchant s Reference LB KG LADEN ON BOARD THE VESSEL MOL DISCOVERY VOY NO 016M AT OAKLAND, CA ON Gross Weight Measurements F M3 Total number of Containers or other packages received by the carrier (inwards): FIVE CONTAINERS Code Tariff Item Basis Freighted As Curr. Rate Per Prepaid Collect OFR A02 BCG DOCUMENT JAPAN TWC PC PC PB PC BL USD USD USD USD BL LADEN ON BOARD THE No. of Originals Place and Date of B/L Issue: VESSEL THREE SAN FRANCISCO Conditions on Reverse Side Totals Pay At: USD SAN FRANCISCO Mitsui O.S.K. Lines, Ltd., as Carrier By 80

84 Chapter 05 A Closer Look at Letter of Credit Documents Frequently Asked Questions What documents should I require? You may request the issuing bank to stipulate any of the above or additional documents that you may need or want. In addition, you should have your customs broker verify that all documents that are required in order to clear the goods through customs have been stipulated. While letters of credit are very flexible, one common-sense rule is to exclude excess detail in the letter of credit, as well as requirements for documents that the seller cannot provide. If you attempt to include documents or conditions in the letter of credit that the seller finds objectionable, they will most likely contact you with a request for an amendment before shipment is made. This invariably will cause delay and additional cost. What happens when the seller does not submit all of the required documentation? It is your bank s obligation to examine the documents received from the seller s bank with the utmost care, and make payment only when all documents conform to the letter of credit that was issued on your instructions. If the issuing bank discovers discrepancies in the documents, they will contact you, list the discrepancies found for your consideration, and inquire as to whether you wish to authorize payment. You must make a decision within a reasonable time period to avoid the possibility of the seller arranging for the return of the merchandise or the sale of the merchandise to a third party. What internal controls does the bank employ to ensure accurate documentary review? How does the bank measure quality of service? Bank of America exercises due diligence and care when examining documents presented under letters of credit in accordance with the guidelines of Uniform Customs and Practice for Documentary Credits (UCP). We have established several levels of checking to ensure our documentary review meets your requirements. Your letters of credit and documents will be checked by our experienced trade specialists who are familiar with your processing and document requirements. Each trade specialist has a specific delegated authority regarding negotiation. For any transaction over that specific dollar amount, an additional review is required. A trade specialist will review all the transactions again to ensure they are in compliance with both your requirements as well as the International Standard Banking Practice (ISBP). Our trade operations managers also perform periodic reviews of the transactions in order to maintain consistent service quality and accuracy. We measure quality using the following five key elements: Timeliness Responsiveness Accuracy Courtesy Knowledge With our strong commitment to service quality, we have set up a system of measurements. All transaction processing times and customer inquiries are recorded by our system automatically. Our trade operations managers review these service levels on a regular basis to ensure that our service standards are met. Historically, the review process mentioned above has resulted in an adherence rate that consistently exceeds 95%. 81

85 Chapter 05 A Closer Look at Letter of Credit Documents A Discussion of the International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP) In November of 2002, the National Committees of the International Chamber of Commerce (ICC) Banking Commission voted overwhelmingly to adopt the International Standard Banking Practice for the Examination of Documents under Documentary Credits, also known as the ISBP. It is believed that the adoption of the ISBP will reduce the number of rejections by banks of documents under documentary credits. The ISBP was updated in July 2007 to bring it in line with UCP 600. The ISBP was written to help businesses that follow the International Chamber of Commerce s internationally accepted rules for letters of credit, the Uniform Customs and Practice for Documentary Credits (UCP). Currently, it is reported that discrepancies in letter of credit documents found by banks in the interpretation and application of the UCP have led to 60-70% of documents being rejected on first presentation. As letters of credit are one of the chosen methods of payment for financing world trade, these rejections have been slowing trade and at times have led to costly disputes and court cases. The ISBP has been written as a supplement to the UCP, and explains how theucp applies to day-to-day practice. It does not amend the UCP, but explains how the practices articulated in the UCP are to be construed by businesses worldwide. The ISBP deals with some of the following most-questioned practices: Alterations: What constitutes an alteration or addition to a document and when and how should these be authenticated? Drafts: What constitutes a proper endorsement? When does sight really occur when documents are discrepant? How should alterations on drafts be treated? Signing of documents: How should documents be signed if not expressly stated in the letter of credit? Applicant and beneficiary addresses: How should obvious typing errors in the name and address on documents be handled? What about different addresses of the same company? Trade terms: Must trade terms, such as Incoterms, appear on the commercial invoice and other documents? Mathematical calculations: How to deal with mathematical calculations appearing on invoices and other documents. Combined documents: Should a beneficiary s certificate, when required under a letter of credit, appear on the invoice or be included as a separate document? Transport documents: What constitutes the face of a document? Insurance documents: What constitutes a full set? What constitutes a proper endorsement? How does one determine the effective date? 82

86 Chapter 05 A Closer Look at Letter of Credit Documents Potential benefits of the ISBP to trade business are significant: As an importer or applicant of a letter of credit, you can look forward to faster receipt of import documents, avoiding demurrage charges and delays in the receipt of goods and ultimately reducing the cost of goods. Banks are anticipating that this new consistency will enhance straight-through processing and significantly reduce the amount of time spent on dealing with discrepancies in their back offices. Your supplier, the beneficiary of your letter of credit, should realize improved cash flow and efficiency as a result of their improved knowledge of document preparation and presentation requirements. The complex nature of the letter of credit will no longer be an obstacle, but an asset to the participants and to the future growth of world trade. The full text of the International Standard Banking Practice for the Examination of Documents under Documentary Credits can be ordered from the ICC Bookstore at 83

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