Letter of Credit Operations

LC Value V Actual Delivered Value of Goods. Exporter has shipped goods to COUNTRY X under IRREVOCABLE CONFIRMED DOCUMENTARY CREDITS available with a bank in his own country. A PRESENTATION valued at USD 4, has been presented to the CONFIRMING BANK who found documents complaint and discounted without getting authorisation from Issuing Bank to DISCOUNT. The Issuing Bank found what they considered to be two discrepancies in the documents but upon applicants waiver they took up the documents. Shortly after arrival of the goods at port of discharge the value of the goods had dropped by almost 40% and due to slow local economic conditions much of the goods remain unsold. Questions: 1)Can the Issuing Bank unilaterally reduce the amount due on maturity date in line with current genuine market values? 2) The contract had a price reduction clause should market prices fall – does this have any impact on the obligations of the Issuing Bank # USD8, # :41Aavailable with/by - swift addr : IBXX XX XX INTERNATIONAL BANK OF ALAKAN BY DEF PAYMENT AT 360 DAYS FROM BL DATE

Interesting Confirming Bank waiting until Issuing Bank Accept Docs Exporter has shipped goods to COUNTRY X under IRREVOCABLE CONFIRMED DOCUMENTARY CREDITS available with a bank in his own country by Acceptance of Drafts at 180 Days from Shipment date. A PRESENTATION valued at USD11,320,000 has been presented to the CONFIRMING BANK who found documents complaint and forwarded the documents to the Issuing Bank. The Beneficiary pursued the Confirming Bank requesting the Confirming Bank to notify them of their Acceptance of the Draft for Payment on Maturity. The Confirming Bank replied that they will provide their acceptance only after the Issuing Bank has Accepted the Documents. They stated that ‘standard banking practice as each bank must examine the documents – good risk management practice” Questions: 1)Can the Confirming Bank wait to provide their Acceptance until after the Issuing Bank have also accepted the documents? 2) What are the implications for the Confirming Bank if the Issuing Bank refuse the documents?

4 Exporter Beneficiary Importer Applicant Importer Applicant THE PARTIES Letters of Credit Advanced Workshop Section – I – Technical Analysis Article 7 Issuing Bank Undertaking a. Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour Article 7 Issuing Bank Undertaking a. Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour Article 8 Confirming Bank Undertaking. Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must: ………………….. …………………………… honour, if the credit is available by sight payment, deferred payment or acceptance with the confirming bank; Article 8 Confirming Bank Undertaking. Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must: ………………….. …………………………… honour, if the credit is available by sight payment, deferred payment or acceptance with the confirming bank; MINI CASE – RECOURSE OR NOT ? Exporter has been shipping goods to COUNTRY X under IRREVOCABLE CONFIRMED DOCUMENTARY CREDITS for over a period exceeding 10 years and presented documents under more than150 LC’S The payment track record up until the most recent PRESENTATION has been excellent with all presentations paid in full. However, the most recent PRESENTATION valued at USD7,787, was rejected by the ISSUING BANK due to valid discrepancies in the PRESENTATION. The NOTICE OF REFUSAL MT 734 was transmitted/sent by the ISSUING BANK on the fourth banking day following ISSUING BANKS receipt of presented documents. At this point in time the beneficiary has already been paid as the LC was available by PAYMENT (SIGHT PAYMENT) with CONFIRMING BANK. Questions: As documents are actually ‘factually’ discrepant can the confirming bank take the money back from the beneficiary ‘seek recourse’. # USD7,787, # :41Aavailable with/by - swift addr : IBXX XX XX INTERESTING BANK ZITRALLAAND BY SIGHT PAYMENT

MINI CASE – CONFIRMATION NOT VALID? Exporter has shipped goods to COUNTRY X under IRREVOCABLE CONFIRMED DOCUMENTARY CREDITS available with a bank in his own country. A PRESENTATION valued at EUR4,440, has been presented to the CONFIRMING BANK who found valid discrepancies in the documents but under instructions from beneficiary then sent/remitted ‘on approval’ the documents to the ISSUING BANK who found the same valid discrepancies in the PRESENTATION but upon applicants waiver the issuing bank send advise of ‘ we take up documents and at maturity date 22 October 2008 will effect settlement as per your settlement instructions in your covering letter’ The exporter was a cash rich company and did not discount/finance under the Credit but anticipated settlement on the maturity date. At maturity on 22 October 2008 the ISSUING BANK failed to reimburse or effect settlement on maturity date due to liquidity and other funding problems in the bank. Questions:(ref: 470/TA.742rev dated 30 March 2011) 1)Has the Issuing Bank defaulted? 2)Has the Confirming Bank an obligation to pay and if it does not pay – then has it the confirming bank defaulted? # EUR4,440, # :41Aavailable with/by - swift addr : IBXX XX XX INTERESTING BANK NO-MONEY LAND BY DEF PAYMENT AT 360 DAYS FROM BL DATE

MINI CASE – is HONG KONG A CHINESE PORT? KEY QUESTION In the eyes of a document checker …………………. IS HONG KONG ACCEPTABLE AS A CHINESE PORT? # USD 7,353,000. # :41Aavailable with/by - swift addr : IGXX XX XX GOOD BANK DUBLIN BY DEFERRED PAYMENT AT 180 DAYS FROM SHIPMENT DATE :43Ppartial shipment : NOT PERMITTED :43Ttranshipment : NOT PERMITTED :44 E Port of Loading/Airport of Departure : ANY CHINESE PORT :44F Port of Discharge/Airport of Destination : SINGAPORE PORT

Assignment of Proceeds Case Study MINI CASE – ASSIGNMENT OF LC PROCEEDS Exporter has shipped goods to COUNTRY X under IRREVOCABLE CONFIRMED DOCUMENTARY CREDITS available with a bank in his own country. A COMPLYING PRESENTATION valued at USD14,440, has been presented to the CONFIRMING WHO INCURRED DEFERRED PAY UNDERTAKING FOR PAYMENT AT MATURITY. CONFIRMING BANK REFUSED TO DISCOUNT/PREPAY/PURCHASE! The exporter requested a NON-NOMINATED BANK to finance the LC and it was agreed that it could be done by way of ASSIGNMENT OF PROCEEDS. 1)Can the Confirming Bank refuse to discount? 2)The export beneficiary should get the ASSIGNMENT FORMALLY ACKNOWLEDGED by who? (Note; in this case you are in same country as exporter and the confirming bank) # USD14,440, # :41Aavailable with/by - swift addr : IBXX XX XX INTERESTING BANK GERMANY BY DEF PAYMENT AT 360 DAYS FROM BL DATE

8 Article 3 Interpretations A credit is irrevocable even if there is no indication to that effect. Article 3 Interpretations A credit is irrevocable even if there is no indication to that effect. INVOICE Article 3 Interpretations A document may be signed by handwriting, facsimile signature, perforated signature, ….stamp, ……. Article 3 Interpretations A document may be signed by handwriting, facsimile signature, perforated signature, ….stamp, ……. 4)A credit should not require presentation of documents that are to be issued or countersigned by the applicant. If a credit is issued including such terms, the beneficiary must either seek amendment or comply with them and bear the risk of failure to do so. 40)A signature on a company letterhead paper will be taken to be the signature of that company, unless otherwise stated. The company name need not be repeated next to the signature. Letters of Credit Advanced Workshop Section – I – Technical Analysis MINI CASE – SIGNED BY REPRESENTAIVE ACCEPTANCE CERTIFICATE - IS DATA CORRECT? :47Aadditional conditions : 1) T 2) 3) ACCEPTANCE CERTIFICATE TO BE SIGNED BY BOTH REPRESENTATIVE OF BENEFICIARY AND REPRESENTATIVE OF APPLICANT.

Exporter Beneficiary Importer Applicant Importer Applicant UCP 600 – Nomination – Availability - Expiry Purchase Order Pro-Forma Invoice Letters of Credit Advanced Workshop Section – I – Technical Analysis Article 12 Nomination a.Unless a nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour……. Article 12 Nomination a.Unless a nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour……. Article 6 Availability, Expiry Date and Place for Presentation a. A credit must state the bank with which it is available or whether it is available with any bank. A credit available with a nominated bank is also available with the issuing bank. b. A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation. Article 6 Availability, Expiry Date and Place for Presentation a. A credit must state the bank with which it is available or whether it is available with any bank. A credit available with a nominated bank is also available with the issuing bank. b. A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation. b. By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank. Force Majeure Implications What are the obligations of Confirming Bank? # USD17,000, European exporter shipping goods to Libya for almost 6 years under irrevocable documentary credits. Credits confirmed by Spanish Bank and excellent track record on payments – so Spanish Bank was Nominated Bank and Confirming Bank. However, situation deteriorates in Libya but exporter still makes shipment of approximately USD 17, under Irrevocable Confirmed Documentary Credit. Goods never reach Tripoli due to Force Majeure at port of discharge. Documents comply but Confirming Bank did not pay due to FORCE MAJEURE which was completely beyond its control.

FORCE MAJEURE

Exporter shipping ‘Trawler Frozen Fish’ to COUNTRY X under IRREVOCABLE DOCUMENTARY CREDIT (NOT CONFIRMED) available with ISSUING BANK. Presentation (COMPLYING ON FACE) made in January for USD187, Presentation not made in February as ‘fishing weather bad’. Presentation (COMPLYING ON FACE) made March for USD196, ‘fishing good’. Issuing Bank did not pay MARCH PRESENTATION did not issue notice of refusal at all but returned documents value USD 196, ‘unpaid’ to presenter. Questions: 1)What is the obligation of the Issuing Bank in this peculiar circumstance? 2) Can you suggest a way to avoid this situation referred to by beneficiary as ‘trap’ # USD800, # :41Aavailable with/by - swift addr : IBXX XX XX INTERNATIONAL BANK OF COMMERCE (ISSUING BANK) BY PAYMENT (SIGHT PAYMENT) 47Aadditional conditions : INSTALMENT DETAILS – PART DRAWING/SHIPMENT WITHIN INSTALMENTS ALLOWED JANUARY - 20,000 KGS VALUE UP TO USD200, FEBRUARY - 20,000 KGS VALUE UP TO USD200, MARCH – 20,000 KGS VALUE UP TO USD200, APRIL – 20,000 KGS VALUE UP TO USD200, LC available by Instalments – fishy business!!.

Lost documents – does it mean lost money? Exporter has shipped goods to COUNTRY X under IRREVOCABLE (NOT CONFIRMED) DOCUMENTARY CREDIT available with a bank in his own country. A PRESENTATION valued at USD 725, has been presented to the NOMINATED BANK which the NOMINATED BANK considered as compliant. The Issuing Bank never received the documents and after 10 days following expiry date of the Letter of Credit they released cash margin to the applicant. About 10 days later the Issuing Bank received an SWIFT 799 from the NOMINATED BANK pushing the ISSUING BANK for payment/reimbursement. Questions: 1)What is the obligation of the Issuing Bank in this peculiar circumstance? # USD725, # :41Aavailable with/by - swift addr : IBXX XX XX INTERNATIONAL BANK OF ZETHERLANDS BY PAYMENT (SIGHT PAYMENT)

STANDBY LC - OPERATION STANDBY LC

Mini Case – Has Standby Obligation? A Standby Letter of Credit was issued by Bank A in Hong Kong with an expiry date of 30 September 2008 with the Confirming Bank Bank B in New York The Irrevocable Confirmed Standby LC was issued subject to UCP 600. On 30 September 2008 the fax machine in the trade finance department received a document on which the Standby LC reference was stated and the data on the fax exactly met the requirements to draw under the standby LC. A very experienced trade finance officer in the Confirming Bank assumed that an original of the demand document would arrive by courier to the bank in the afternoon and took no action other than checking the data and appending the copy to the file. The original never arrived that afternoon. However, the original of the document arrived on 12 October 2008 Questions: 1) Has the Confirming bank anything to worry about in this case? 2) What rule in UCP would your reference in this operational case? 3) Bearing in mind your answers to 1) and 2) what is the obligation of the Issuing bank and the applicant of the standby as originally issued? A Standby Letter of Credit was issued by Bank A in Hong Kong with an expiry date of 30 September 2008 with the Confirming Bank Bank B in New York The Irrevocable Confirmed Standby LC was issued subject to UCP 600. On 30 September 2008 the fax machine in the trade finance department received a document on which the Standby LC reference was stated and the data on the fax exactly met the requirements to draw under the standby LC. A very experienced trade finance officer in the Confirming Bank assumed that an original of the demand document would arrive by courier to the bank in the afternoon and took no action other than checking the data and appending the copy to the file. The original never arrived that afternoon. However, the original of the document arrived on 12 October 2008 Questions: 1) Has the Confirming bank anything to worry about in this case? 2) What rule in UCP would your reference in this operational case? 3) Bearing in mind your answers to 1) and 2) what is the obligation of the Issuing bank and the applicant of the standby as originally issued?