THE TRADE FINANCE QUARTERLY OF THE INTERNATIONAL CHAMBER OF COMMERCE

Vol 19 No 3 July September 2013

Bogus documents and L/Cs
put banks at risk
by P. Mukundan
Under sub-article 14 (a) and article
34 of UCP 600, banks are not
obliged to go beyond the
documents as they appear on their
face nor can they be held
responsible for the falsifcation of
the documents presented. If that is
the case, does it matter to banks if
the documents presented relate to
a non-existent cargo?
There are two aspects to this issue. On
the one hand are the obligations that
banks enter into between each other
under the UCP. UCP 600 correctly refects
the position with the articles above.
Notwithstanding this, there are very real
risks that banks assume vis--vis their
counterparties and regulators if
inadvertently they fnance customers
who regularly present spurious
shipments to them.
Compliance with the UCP is only one
side of the risk coin. It is easy for bankers,
through blind adherence to the UCP and
the exclusion of all else, to ignore the fip
side risks of fraud and money laundering.
A few current cases highlight this.
Middle East banks
The secondary market in L/Cs in the
Middle East is a well-established business
through which banks seek to fully exploit
their correspondent banking
relationships or increase the volume of
their trade fnance transactions. This
sometimes helps those banks that do not
have direct access to a wide range of
trade fnance customers.
A Middle East bank active in this trade
was approached by a bank in North Africa
to buy a set of documents, valued at
tens of millions of US dollars, on a 90-day
deferred payment basis, which appeared
to involve a government buyer in that
country. It was only when the bank
investigated the transaction through the
International Maritime Bureau (IMB) that
it discovered the shipment had not taken
place as described on the documents and
rejected the ofer.
This information was passed on to the
originating bank in North Africa. Within
weeks, a number of other banks were
ofered the same set of documents.
Secondary banks ofered these
transactions are inherently remote from
the customer with little knowledge of the
customers business and the true context
under which the transaction was ofered
to the banks. They are vulnerable.
The easy approach is to take the view
that the secondary bank is not concerned
with whether the goods exist or not, but
simply takes a credit risk on the North
African bank. However, there is the
practical risk in the event of a fraud that
local courts in the North African country
may take a diferent view concerning the
contractual obligations under the UCP.
This may not be what the UCP intends,
but hard-pressed nations have tried to
resist paying out tens of millions of
dollars if they have not received value in
return. It is this reality which may impose
upon the prudent Middle East bank a
need to make checks to ensure that the
shipment was performed. Buyer beware!
An Asian case
A bank in Asia received a substantial L/C
(Master L/C) for the shipment of fnished
garments. In turn, as permitted under the
L/C, it split the L/C into many diferent
back-to-back sub-L/Cs favouring
> continued on page 22
Inside DCInsight
Bogus documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Banking Commission news. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Insight interview (Andr Casterman). . . . . . . . . . . . . . . 3
Queries and responses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ISBP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Expert commentary (Sarah Younger) . . . . . . . . . . . . . . . . . 11
Special report: Islamic banking . . . . . . . . . . . . . . . . . . . . . . 13
Guarantees and standbys . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
The UCP in court. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Insurance documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Multilateral development banks . . . . . . . . . . . . . . . . . . . . . 19
DOCDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
In brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Volume 19 No 3 2
Editors note
Its been an intense period for the ICC
Banking Commission (see following
article), with the passage of the new
URBPO rules, the revised ISBP, the
expansion of the Commission into
regional commissions and new initiatives
on compliance. As usual, at DCInsight we
try to expand on the news by running
features that put some meat on the
bonesof the news.
In this issue, we run a
long interview with Andr
Casterman, who
co-chaired the committee
drafting the URBPO rules.
Andr is quite candid
about what it will cost
banks to be
technologically ready to
use the BPO between
10,000 and 27,000 to
begin with. But, he adds,
those costs can be ofset by the
additional fees that the banks can charge
corporates as they do now on the letter of
credit transactions.In other words,
expensive in the short run but well worth
it in the long run. Andr also makes a bold
prediction when he claims that, by the
end of the decade, I would expect BPO
use to be as widespread as that of L/Cs.
Well see. Commentators have been
forecasting the increasing electronic
replacement of L/Cs for some years now,
and it hasnt happened yet which is not
to say it wont.
On the related question of electronic
presentation of L/Cs, Sarah Younger, in our
Expert commentary, says that its just a
matter of time. In the not-too-distant
future, reality will overcome
conservatism,she contends.
We also run two critiques of the new
ISBP revision. In one, David Meynell, while
hailing the revision, expresses some
regrets it was not more ambitious in
covering more aspects of handling
documentary credits. Kim Sindberg, who
calls the revision an invaluable tool,
refutes critics who say that another
revision was unnecessary. It was, he says,
in light of documents and practices that
UCP 600 as well as the related industries
have created.
We like this mix of stories. Hope you
will too.
Ron Katz
Editor
Banking Commission news
Money laundering, regional
expansion and trade
fnance awards
During the last several months, ICCs
Banking Commission has branched
out with new initiatives on anti-
money laundering (AML), has
engaged in regional expansion and
has received international
recognition for its trade services
activities.
A newly formed group, the ICC Banking
Commission Compliance Group, has been
set up to respond to the increasing number
of issues the industry faces in meeting the
regulatory requirements around compliance
for fnancial institutions. Composed of a
small group of experts, the group will
interact with, and draft guidance, policy
submissions and responses to regulators on
all topics related to compliance issues
afecting the trade fnance industry. Some of
the issues to be covered:
sanctions regulations and consequences
of not understanding the requirements;
customer due diligence requirements;
know your customer and correspondent
banking requirements;
AML in respect of trade;
terrorist fnance and weapons
proliferation;
fnancial crime, including tax evasion and
other ofences relating to trade products
and services; and
narcotics and people trafcking.
The main bodies with which the
Commission will interact include the
Financial Action Task Force (FATF)
headquartered in the OECD; the Wolfsberg
Group, an association of eleven global
banks, which aims to develop fnancial
services industry standards in KYC, AML
and counter-terrorist fnance, as well as
other fnance industry groups. This broad
remit refects the seriousness with which
the Commission views the growing
problems associated with compliance.
A second Commission initiative is aimed
at de-centralizing some of the
Commissions activities by improving the
global reach for ICC banking products and
services. To accomplish this, the frst step
was to set up a regional banking
commission in the Middle East and North
Africa (MENA) region, with the objective to
engage policy makers and business on a
dialogue relating to regional trade fnance
issues.
MENAs program is a full one. In Dubai in
May, it organized a regional briefng on the
new Bank Payment Obligation (URBPO)
rules and reported the results of the new
ICC Global Survey on Trade Finance. In
September 2013, again in Dubai, it will
organize a public relations trade event in
parallel with SIBOS, an event that brings
together 7,000 experts from fnancial
institutions, multinational corporations and
technology partners. And in November
2013, it will hold a trade facilitation
consultation by invitation only to
discuss trade fnance challenges.
This regional initiative, if successful,
could be followed by the establishment of
regional banking commissions in other
parts of the world as well.
In June, following on the successful
launch of the URBPO rules and the approval
of the revised ISBP, the Commission
received a welcome accolade in the form of
an award as the best non-bank services
provider from the prestigious publication
Trade and Forfaiting Review. The fnal results
took a 75% weighting of the votes cast with
the remaining 25% weighting being
applied by the editor and based feedback
from the marketplace, engagement from
the institutions nominated, observations of
deal fow and general activity and reports
on nominations gathered over the last 12
months. The award for the best trade bank
in the world was won by J.P. Morgan; the
award for the most innovative trade bank
was garnered by Standard Chartered.
Commenting on the Banking
Commission award, Commission Chair Tan
Kah Chye said: This recognition marks the
shifts taking place in the Banking
Commission as we strive to keep pace with
the changes taking place in world markets.
The Commission has scheduled its
autumn meeting in Vienna from 21-25
October. Among the matters to be
discussed will be implementation of the
BPO rules and the new rules for the
DOCDEX dispute resolution process.
For further information about the meeting, contact
Whitney Jolivet at wfh@iccwbo.org
July September 2013 3
The Insight interview: Andr Casterman
The future of the Bank Payment
Obligation (BPO)
Andr Casterman is Head of
Corporate and Supply Chain
Markets at SWIFT and is Co-Chair
of the BPO Project that developed
the recently adopted ICC/URBPO
rules and related SWIFT messaging
standards.
DCI: Some commentators have called the
BPO the most revolutionary development in
trade fnance for some decades. But the
question still arises: apart from the largest
banks, how aware are most banks of the
BPO, and what it can mean to
theirbusiness?
Casterman: There is a growing
awareness in the market. More and more
banks now understand what we are
doing, in terms of ICC and SWIFT helping
them to accelerate the inter-bank trade-
related processes. We see more banks all
over the world joining the SWIFT trade
matching application called the Trade
Services Utility (TSU) to adopt the BPO
and to operate BPO transactions on
behalf of their corporate clients. We try to
help banks structure their
commercialeforts.
On the corporate side, there is still
much more to achieve to raise awareness.
This awareness can be achieved, not by
focusing on the BPO as a payment
instrument, but rather by advertising the
value-added services that banks can ofer
on top of the BPO, such as payment
assurance, pre-shipment fnance and
post-shipment fnance.
DCI: The BPO was conceived in part as an
electronic solution to the increasing move
to open account. Is this change to open
account common to all regions or are there
still some where the letter of credit still
dominates trade fnance transactions?
Casterman: Asia is a region where letters
of credit remain a key instrument for the
majority of the trade transactions. It is
hard to quantify how much the L/C is
securing trade in Asia, but what we can
see from SWIFTs trafc statistics is that 70
per cent of the letters of credit have a leg
in Asia. 80 per cent of those are intra-
Asian letters of credit.
DCI: People have been forecasting the end
of paper-based trade fnance for some time
now. When ICC developed the eUCP rules,
for example, there was talk of electronic
trade fnance becoming dominant within a
decade, but that has not happened. Why is
the BPO any diferent from what has not
happened with the eUCP?
Casterman: The L/C is here to stay. No
one really wants to eliminate or replace it.
It will remain the preferred instrument for
parties to secure a trade transaction
when the level of trust is low or zero. But
as soon as trading parties have more
confdence in their relationship, they will
ask their banking partners to be more
fexible and efcient when ofering risk
mitigation and fnancing.
And this is where the BPO starts to
make sense, when risk fnancing is
required but efciency becomes critical
for the exporter to be more competitive
or for the importer to pay suppliers faster,
for example.
The BPO does not aim to replace letter
of credit transactions, and the real
challenge for banks is to attract
transactions that have moved away from
the L/C to open account and that are
secured with a partial advance payment,
a payment guarantee or credit insurance.
These are the transactions the banks can
win back with the BPO.
With the BPO, they will be able to do
more than with the payment guarantee,
and if they attract transactions from the
credit insurance world, they will be
winning the competition against the
insurance sector.
DCI: In that regard, as of June 2013, how
many banks have indicated that they are
prepared to use the BPO?
Casterman: At this time, 50 banking
groups have confrmed to the corporate
market that they are adopting the BPO.
But on the technical platform, we have
more than 80 banking groups connected
to the platform in order to operate BPO
transactions. That number is
continuouslyincreasing.
DCI: So, you are satisfed with the pace of
growth of the BPO adoption?
Casterman: Im very satisfed on the bank
side given the progress made by various
banks. The next challenge we face is on
the corporate side, to attract more
corporates to adopt the BPO. This is
happening thanks to a dozen of banks at
this time.
DCI: Lets look at some of the impediments
banks face before deciding to use the BPO.
The frst is cost and specifcally the cost of
technology to implement the BPO. One DCI
writer said and I quote Some market
participants question whether its worth
spending a large amount of money on this,
particularly when a bank may not fnd a
trading partner who can provide a similar
electronic set up. Is this a valid point and
whats the typical technology cost for a
bank to ofer the BPO?
Casterman: The minimum technology
investment for the bank to operate a low
volume of BPO transactions is between
10,000 and 27,000 euros. This includes
being connected to the SWIFT platform,
which is a bank-to-bank messaging and
matching tool to operate BPO
transactions.
That is the cost to the bank. Once the
volume materializes, banks need to
increase their internal automation, and
there they have to talk to their vendors to
take advantage of the BPO functionality
that their trade fnance lenders are
supporting. That is an additional cost.
Those costs can be ofset by the
additional fees that the banks can charge
corporates as they do now on the letter
of credit transactions.
DCI: Is it fair to say that only very large
banks are likely to take on these costs
willingly?
Casterman: I would expect BPO use to be as widespread
as that of L/Cs
Volume 19 No 3 4
Casterman: Fifteen of the top 20 trade
banks are connected to the Trade
Services Utility. But we also have many
smaller banks from various countries
such as China, Argentina, Chile, Korea,
Morocco, Jordan, Belgium, etc., that are
seeing the benefts of the BPO and want
to market it to their clients. The
innovation is not only relevant to large
banks and large clients. And the bank
may ofer those services over a paper
channel to their clients or using their
internet portal. Corporate-to-bank fows
do not need to be on SWIFT, only the
bank-to-bank fows.
DCI: There is another impediment to BPO
adoption, and that is the conficting
legalization and compliance requirements
in diferent countries. Since compliance and
sanctions requirements have increased and
countries may have these conficting
standards, isnt this a hindrance for banks
in those countries wanting to ofer the BPO?
Casterman: Compliance requirements
are growing, and they are as valid for L/Cs
as for BPOs. Whatever the underlying
instrument, these requirements are valid
across the board. They may hold back
banks from entering geographic areas or
may encourage banks to pull out of some
areas. That would, as a whole, limit their
trade payments and trade business in
those areas, including the BPO. However,
the BPO makes it easier to adhere to
sanctions screening because the data
must be more structured.
DCI: Now that ICC and SWIFT have now
teamed up to produce rules for the BPO, is
this likely to help make standards more
uniform internationally?
Casterman: Yes, defnitely. That is
something that banks expect from any
new initiative: that all of the innovations
be based on common standards. The
banks do not want to operate with
multiple formats. With clients, of course,
it is the commercial aspect that counts.
They will accept any kind of format.
But on the bank-to-bank segment,
there is really a need for uniform
standards. These standards are not only
the messaging standards that SWIFT
developed over 40 years, but also the
legal standards that ICC has been
developing for 80 years.
The two sets of standards have to go
well together, and that is why the BPO is
so special. For the frst time, the ICC/
URBPO rules mandate the use of
common messaging standards between
banks and a centralized matching
application, the TMA, which is SWIFT-
issued today. but which could be in
another system in the future.
That is how banks can easily focus
their eforts on the corporate-to-bank
commercial proposition, which includes
corporate-to-bank contracts, corporate-
to-bank commercial pricing and
commercial oferings that rely on highly
standardized bank-to-bank standards.
DCI: On the question of supply chain fnance
and the BPO, can you explain how that
works for some of the banks that may not
be familiar with it?
Casterman: The topic of supply chain
fnance is an important innovation that has
arisen in the last several years. As defned
by banks a few years ago, the use of
electronic fows has been basically linked to
automated fnancing. The bank receives
electronic data of approved payables from
a large buyer and with those approved
payables it will manage the risks of future
receivables and will automatically ofer
discounting to suppliers.
The bank makes a margin out of this
intermediation between larger buyers
and their suppliers. That is quite
interesting for suppliers looking for early
payment at a discounted rate defned on
the basis of the buyers credit standing,
which is usually better than the suppliers.
So, essentially we are talking about a
situation where we have a large buyer
and smaller suppliers. This is a very
interesting development because it
shows that fnancing can be automated.
The limitations of that scheme are that
it has been developed by large banks in
support of large buyers and in a very
proprietary way, where there are no
standards. The bank works on its own,
not with local banks that already have the
suppliers as customers. The buyers bank
takes on board all those suppliers, which
leads to more know-your-customer, on-
board processes.
These are issues not usually advertised
by banks. But thanks to the work ICC and
SWIFT have done, were enabling the
buyers bank to work with local banks and
to avoid having to take on board all of
those suppliers by working with the local
banks that have already done so on their
Web banking systems.
We are enabling the market to move
from a single non-standardized bank set-
up to a standardized two-bank set-up.
That will remove the know-your-
customer issues for the buyers bank, and
it will increase the role for local banks
supporting those suppliers. It will also
enable the banking industry as a whole
to extend what is now called approved
payables fnance to the very early stage
of the transaction, which can be called
purchase order fnance or
pre-shipmentfnancing.
That is what we aim to do, and we
have found that the large banks are
looking for this kind of collaboration with
local banks.
DCI: What do you say to banks that may
fear that using the BPO will cannibalize the
revenues they currently earn from their
traditional paper-based lc business?
Casterman: We tell them that the BPO
will defnitely cannibalize some of their
letter of credit revenues, but that is
basically good for banks. First, they will
keep those transactions in their shop
rather than losing them to competitors
that ofer alternative risk mitigation
services.
They will be able to charge the risk fee,
which is the most important value-added
banks can ofer the corporate: to take on
the risk of these future payments, with
conditions, of course.
They will be able to remove costs not
adding value such as courier costs,
manual processing costs, etc. resulting
from paper-based processes. With these
costs removed, the margins will increase,
but also their competitiveness will
improve because they wont have to
charge those costs to their clients.
In short, they will be able to retain the
trade transactions in their trade business
whilst continuing to ofer their main
value-added service, which is risk
mitigation, and possibly fnancing.
Whereas if they continue only with letters
of credit and do not have the tools such
as the BPO to ofer with their service, they
might lose the L/C business and lose their
role in those transactions as well.
DCI: Looking ahead, lets say to 2020, would
you think that in that time frame, there
would be a generalized acceptance of the
BPO, by both smaller banks and those with
the resources now to adopt it? How
widespread would you expect BPO use by
The URBPO rules: defnition of a BPO
Bank Payment Obligation or BPO means
an irrevocable and independent
undertaking of an Obligor Bank to pay or
incur a deferred payment obligation and pay
at maturity a specifed amount to a
Recipient Bank following Submission of all
Data Sets required by an Established
Baseline resulting in a Data Match or an
acceptance of a Data Mismatch pursuant to
sub-article 10 (c).
July September 2013 5
the end of this decade?
Casterman: Looking to the 2020
milestone, I would expect BPO use to be
as widespread as that of L/Cs, because as
corporates discover the BPO, they will be
asking their banks to develop payment
assurance and fnancing services. And we
know that banks can act very quickly
when the corporate demand is there.
Hopefully, by 2020 the BPO will
support more trade transactions than the
letter of credit because the L/C has
virtually disappeared in some regions,
and banks want to win back transactions
that moved to partial advance payments
or payment guarantees which are not
welcomed by importers or to credit
insurance, which is not good for banks.
Andr Castermans e-mail is
andre.casterman@swift.com
Queries and responses
Opinions: Lisbon Banking Commission meeting
UCP 600 sub-articles 6 (d)
(ii), 6 (a) and 7 (a)
When a credit stipulated that
documents were to be sent in two
lots, must both lots be received at
the place for presentation, in this
case the counters of the issuing
bank, on or before the expiry date
or the latest date for presentation?
Query [TA 785rev]
We kindly request your ofcial opinion for the
following query related to a documentary credit
issued subject to UCP 600.
Under a documentary credit that was available
with the issuing bank and expiring at its counters,
documents were to be sent to it in two lots the
frst lot by special courier service and the second
by registered airmail. The issuing bank received
the frst lot, containing one original of all the
required documents, within the presentation
period stipulated in the documentary credit.
However, the second lot, containing the
remaining documents, i.e., both originals and
copies, was received after the documentary credit
expired. In such a case, is the issuing bank obliged
to honour the presentation based upon the
content of the frst mailing?
Is ICC Opinion R 415, regarding documents
sent in two consecutive lots, which was decided
under a UCP 500 credit, still valid for documentary
credits subject to UCP 600?
Analysis
UCP 600 sub-article 6 (d) (ii) includes: The place
of the bank with which the credit is available is
the place for presentation.
UCP 600 sub-article 6 (e) states: Except as
provided in sub-article 29 (a), a presentation by or
on behalf of the benefciary must be made on or
before the expiry date.
UCP 600 sub-article 7 (a) states: 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 .
The credit was available with the issuing bank
and expired at its counters. Under these
circumstances, the issuing bank must receive all
the stipulated documents called for under the
credit, in the required number of originals and
copies and within the stated expiry date and
presentation period, for it to determine whether
the presentation is compliant. The issuing bank
received only one original of all the stipulated
documents in the frst lot and, therefore, it was
not in a position to determine compliance with
the terms and conditions of the credit until the
second lot had been received.
When a credit stipulates documents are to be
sent in two lots, both lots must be received at the
place for presentation, in this case the counters of
the issuing bank, on or before the expiry date or
the latest date for presentation.
When a credit is available with an issuing
bank, such bank should not incorporate a mailing
condition that requires the documents to be sent
in two mails. If a credit is available with an issuing
bank, it is the responsibility of the benefciary to
ensure that the documents are received by that
issuing bank within the credit validity and the
applicable presentation period.
Conclusion
The issuing bank is not obliged to honour if
the second lot is not received within the expiry
date of the credit. The presenter was required
to ensure that the issuing bank would receive
both lots within the expiry date and applicable
presentation period.
ICC Opinion R 415 is still valid under UCP
600. However, it does not apply in this
case since the credit is available with the
issuing bank.
UCP 600 sub-article 14 (a)
If a credit required shipment to be
efected from any Chinese Port,
and where the shipment has been
efected from Hong Kong, would
that comply with the requirement
of the credit?
Query [TA 770rev2]
If a credit required shipment to be efected from
any Chinese Port, and where the shipment has
been efected from Hong Kong, would that
comply with the requirement of the credit?
Analysis and conclusion
When a credit indicates that shipment is to be
efected from Any Chinese Port(or to Any
Chinese Port), it is recognized that in the context
of examination of documents on their face, in
accordance with UCP 600 sub-article 14 (a), this
would include Hong Kong being shown as the
port of loading (or port of discharge).
However, applicants and benefciaries should
be aware that difering customs, systems and
regimes operate in Hong Kong and at ports on the
Chinese mainland. Therefore, a credit should
specifcally indicate where shipment is only to be
efected from or to a port on the Chinese
mainland. This comment is particularly relevant to
applicants based on the mainland that may
require, or at the very least expect, delivery to
occur at a port on the mainland as opposed to
Hong Kong. Otherwise, banks will be required to
honour or negotiate documents that indicate
shipment from or to Hong Kong, even though the
expectation under the contract and the credit may
have been for the use of a port of loading (or
discharge) on the mainland.
UCP 600 sub-articles 14 (a),
16 (c) and 16 (d)
If the documents were received by
the issuing bank after the expiry
date of the credit, did this relieve
it from acting in accordance with
the requirements of UCP 600 sub-
article 14 (a), and sub-articles
16 (c) and (d), as the presentation
was made timely at the confrming
banks counters?
Query [TA 782]
An issuing bank (IB) in Country L opened a credit,
subject to UCP 600, available by payment at sight
at the counters of a confrming bank (CB) in
Country U. Validity was 31/12/2011 in Country U.
The CB added its confrmation and advised the
credit through an advising bank (AB) in CountryB.
The benefciary presented documents to the AB,
Volume 19 No 3 6
which found a non-disputable discrepancy (charter
party bill of lading presented, which was not
allowed). As shipment to Country L was urgent,
the benefciary instructed the AB to present the
documents urgently in trust on approval basisto
the CB and, so further, to the IB. The AB, acting as
presenting bank, complied with these instructions
and forwarded the documents under the L/C with
following instructions to the CB: We herewith
authorize you to send documents on approval basis
due to the stated discrepancy without verifcation.
The documents arrived with the CB in CountryU
before the expiry date. The CB refused the
presentation in due time according to sub-article
16 (d) for the reason of Charter party B/L
presentedand forwarded the documents to the IB
on 3 January 2012 on approval basis, referring to
the credit. The IB received the documents from the
CB on 10 January 2012, but after reminders were
sent by the AB, the IB refused only on 24January
2012 to the CB.
When the AB drew the attention of the CB and
the IB to the non-compliance of article 16 by the
IB, the CB replied that the documents had been
forwarded in trust, on an approval basis. The IB
also stated that the L/C expired prior to receipt of
the documents by IB, i.e., 10 January 2012, and
that such documents are outside the scope of UCP
600 and no rejection notice as per article 16
isrequired.
The AB disagreed with this, stating that its
presentation was timely received by the CB,
where the credit was available and that LC
expiredcould not be a valid discrepancy. The AB,
therefore, claims payment from the IB based on
the argument that the IB did not timely reject the
presentation according to sub-article 16 (d) and,
as a consequence, has to pay according to sub-
article 16 (f ).
Despite continuing disagreement, the
documents were returned by the CB to the AB.
Query:
1) Did the fact that the presentation by the CB to
the IB took place after the expiry date of the credit
discharge the IB from acting according to sub-
article 16 (d)?
2) If not, has the AB the right to claim payment
from the IB?
Analysis
The credit was available by payment at the
counters of the confrming bank against
presentation to it of the documents stipulated
therein. Due to an indisputable discrepancy, the
confrming bank, at the request of the presenting
bank, sent the documents to the issuing bank for
approval. It is to be noted that a presentation was
made to the confrming bank within the expiry
date and thus bound the issuing bank to examine
the documents.
When the issuing bank received the referenced
documents, it was required to determine whether
they complied, according to the requirements of
UCP 600 sub-article 14 (a). Having determined
that the documents were discrepant, and
deciding to refuse them, it was required to send a
notice of refusal in accordance with sub-articles
16 (c) and (d).
The issuing bank refused the presentation only
14 calendar days after receipt. The reason given
was that the credit had expired prior to its receipt
of the documents, that the presentation was
outside the scope of UCP 600, and that no notice of
refusal according to UCP 600 article 16 is required.
The notice of refusal sent by the issuing bank
fails in two respects. First, the reason for refusal
L/C expiredis not correct for the reasons stated
above, and second, it had not been sent by the
close of the ffth banking day following the day of
presentation to the issuing bank.
Conclusion
Query 1
The fact that the documents were received by
the issuing bank after the expiry date of the
credit does not relieve it from acting in
accordance with the requirements of UCP 600
sub-article 14 (a), and sub-articles 16 (c) and
(d), as the presentation was made timely at
the confrming banks counters.
Query 2
The issuing bank is required to honour the
presentation.
UCP 600 sub-article 22 (a) (i)
Is a CPBL issued and signed by a
carrier or a named agent for a
named carrier discrepant because
such parties are not named in UCP
sub-article 22 (a) (i)? If so, why
cannot a carrier or its agent be an
issuer and signatory of a bill of
lading subject to a charter party
contract?
Query [TA 775rev]
Charter party bill of lading issued and signed by
carrier or an agent for the carrier
We seek the opinion of the ICC Banking
Commission on the above subject.
UCP 600 sub-article 22 (a) (i) states that a
charter party bill of lading (CPBL) must appear to
be signed by any of the following parties:
a)the master;
b)the owner;
c)the charterer; or
d)a named agent for any of the above
Not included in the list of signatories is a
carrier or a named agent for a carrier. While such
CPBLs (issued and signed by a carrier and/or
issued and signed by a named agent for a named
carrier) were seldom seen in the past, recently
they have been spotted with
increasingfrequency.
The immediate and obvious response to such a
CPBL is one of discrepancy, as the signatory is
not any one of the parties listed in sub-article
22(a) (i). However, those opposing the
discrepancy argue that:
UCPs mere silence in this matter is not enough
justifcation for dishonour.
UCP does not specifcally prohibit such a CPBL.
Articles 19, 20 and 21 give the impression that
the carrier and/or its agents B/L is somehow
superiorto the CPBL since, unless otherwise
expressed, a CPBL is not good tender.
Based on conventional L/C practices and the
UCP, banks are to examine only the face of
documents and not go beyond, beneath, over or
further than the documents data content. Would
this not necessarily mean that banks need not
(and most really do not) have intimate
knowledge of vessel chartering and related
arrangements and structures?
In short, we would like to clarify:
Is a CPBL issued and signed by a carrier or a
named agent for a named carrier discrepant
because such parties are not named in the above-
quoted sub-article?
If so, we would like to know why a carrier or its
agent cannot be an issuer and signatory of a bill
of lading that is subject to a charter
partycontract.
Analysis
When a credit simply allows for or requires the
presentation of a charter party bill of lading
(CPBL), a CPBL issued and signed by a carrier or
its agent is discrepant under UCP 600 sub-article
22 (a) (i).
The reason for excluding such CPBLs from this
sub-article was to avoid document examiners
having to determine which one, of a possible
number of diferent entities ranging from the
owner to charterers and sub-charterers, might be
the contractual carrier under the contract of
carriage as evidenced by or contained in the
CPBL. The reasoning underlying the current terms
of the sub-article is consistent with the principle
that document examiners must examine a
presentation to determine, on the basis of the
documents alone, whether or not the documents
(in this case a CPBL) appear on their face to
constitute a complying presentation, without
examining the terms of the contract of carriage
for that CPBL.
However, when a credit expressly allows for or
requires the presentation of a CPBL issued and
signed by the carrier or its agent, then the CPBL
referenced in the query would not be discrepant;
the express terms of the credit will prevail over
the default position set out in UCP 600 sub-article
22 (a) (i). In this situation, a document examiner
need only determine whether the CPBL presented
appears on its face to be issued and signed by or
on behalf of an entity described as the carrier.
July September 2013 7
Conclusion
Question 1
UCP 600 sub-article 22 (a) (i) does not permit a
CPBL to be signed by a carrier or its agent.
Question 2
A CPBL signed by a carrier or its agent is
discrepant unless the credit expressly requires
such a CPBL, for the reasons stated in
the Analysis.
ISBP 681 paragraph 23
Was the confrmation invalid if a
shipping mark contained symbols
or wording that was not in English
as opposed to symbols or
lettering shown in Spanish? When
the confrming bank refused
documents on the basis that the
documents did not comply with
a condition attached to its
confrmation, was it entitled to
claim reimbursement if it did not
waive the condition and take up
the documents, or if it did not act
in its role as nominated bank?
Query [TA 776rev]
We would like to seek an ofcial opinion of the
ICC Banking Commission on the following
questions related to shipping marks appearing in
the documents presented under a documentary
credit issued subject to UCP 600.
The documentary credit was issued by Bank I
in a Central American country and confrmed by
Bank C in Country T.
Relevant information of confrmation advice
and L/C:
1. The confrmation advice stated: Our
confrmation will be null and void if any
wording, except description of goods indicated
on the L/C appearing on any presented
document, is not in English.
2. The L/C was issued in English except for the
applicants name and address and the
description of goods that were in Spanish.
There was no special requirement regarding
the language in which the documents were to
be issued.
3. The L/C stated: Upon receipt of original
shipping documents in full compliance with
the terms and conditions, you are authorized
to claim reimbursement from Bank R (the
reimbursing bank, i.e., the confrming banks
head ofce in New York).
Documents presentation:
1. Documents were presented to the confrming
bank through us.
2. The confrming bank refused payment as
follows: Shipping marks bearing wording
not in English.(The L/C was silent with regard
to shipping marks, which appeared in the
documents in Spanish.)
3. We rejected this refusal as follows:
Shipping mark is not any wording. It is just a
symbol used to identify the goods during
import and export, so that it will be easily
recognizable. Since the documents presented
constitute a complying presentation, please
efect payment immediately.
4. The confrming bank refused again as follows:
The discrepancy is valid. Pls refer to
paragraph 23 of ISBP, a nominated bank
(including the confrming bank) may, in its
conformation advice, restrict the number of
acceptable language[s] as a condition of its
engagement and confrmation in the L/C.
In our opinion, as stated in our rejection of the
refusal, a shipping mark is just a symbol used for
identifcation purposes only; it does not constitute
any wording of documents, and therefore the point
is not related to paragraph 23 of ISBP.
Much to our regret we were not able to
convince the confrming bank. It insisted on
sending the documents to the issuing bank for
approval to obtain its authorization to claim
reimbursement from the reimbursing bank.
However, it could not determine any discrepancy
subject to the L/C terms. Nevertheless, the issuing
bank authorized the confrming bank to claim
reimbursement, and payment has been received.
We would like to seek your opinion on the
following two questions:
1. Is the discrepancy raised by the confrming
bank valid with respect to the shipping mark?
2. Is the confrming bank in a position to claim
reimbursement from the reimbursing bank if
the confrming bank determines that the
presentation does not comply with its own
requirements, but does comply with the
L/Cterms?
Analysis
The confrming bank qualifed its confrmation
undertaking by stating: Our confrmation will be
null and void if any wording, except description of
goods indicated on the L/C, appearing on any
presented document is not in English.In the
context of this query, the confrmation is only to
be considered invalid if the shipping mark
contained wording that was not in English as
opposed to symbols or lettering shown
inSpanish.
Even though the shipping mark is not in
English, there is no requirement in the credit for
documents to show shipping marks. There is also
no restriction concerning the language in which
documents are to be issued. Therefore,
documents showing shipping marks in Spanish
do not constitute a discrepancy under the credit.
In view of the condition that the confrming
bank applied to its confrmation in respect of an
acceptable language, it had no obligation to
honour or negotiate. Although it had no such
obligation, and the documents were otherwise
compliant with the terms and conditions of the
credit, the bank could have agreed to act in its
role as nominated bank by forwarding the
documents to the issuing bank and claiming
reimbursement, and efecting settlement to the
benefciary upon receipt of funds or to make
settlement to the benefciary on a with
recoursebasis.
The issuing bank still had an obligation to
honour a presentation that complied with the
terms and conditions of its credit.
Conclusion
The discrepancy is not valid under the terms of
the credit, and the issuing bank would be
required to honour the presentation. The use
of any Spanish language in the wording of the
shipping mark would cause the confrmation
of the confrming bank to cease in respect of
that drawing.
Given that the confrming bank
refused documents on the basis that the
documents did not comply with a condition
attached to its confrmation, it was not
entitled to claim reimbursement unless it
subsequently waived that condition and
agreed to take up the documents, or was
willing to act in its role as nominated bank, as
outlined in the Analysis.
Overturned UCP 600 Opinions
DCInsight readers should note that the agreed text of ISBP publication 745 contains two practices that difer from previously
agreed positions that have been published as ICC Opinions. These are Opinions R 751 (TA 735rev) and R 766 (TA 709rev). These
Opinions appear in the ICC booklet ICC Banking Commission Opinions 2009-2011, publication No. 732.
Opinion R 751 is superseded by the practices described in paragraphs D1 (c) and E1 (a) of the new ISBP 745. For R 766, this
Opinion is superseded by the practice described in paragraph K10 (c). These two Opinions are to be considered withdrawn with
immediate efect.
Volume 19 No 3 8
ISBP
Two experts consider the revised ISBP
The new ISBP: keeping up with the times
by David Meynell
Change is inevitable ... change
is constant.
Benjamin Disraeli, 1867
My frst contact with standard banking
practice was way back in April 1997 at the
ICC Banking Commission meeting in
Shanghai. Representatives of ICCs US
National Committee showed me a
publication entitled Standard Banking
Practices for the Examination of
Documents (SBPED), which covered
standard banking practices jointly agreed
by the US Council on International
Banking and the Mexican Bankers
Association. It was immediately obvious
that this could be expanded into a global
agreement under the auspices of ICC.
As we all know, this was completed in
2003 with the publication of ISBP 645,
and the subsequent updated ISBP 681,
which provided alignment with UCP 600
in 2007. The 2007 revision left much of
ISBP unchanged, although certain
alterations had to be made. UCP 600
required a few years of practice before
any signifcant adaptation of ISBP could
be implemented. Fortunately, many of
the required changes have been
enshrined in ICC formal Opinions issued
since 2007.
Operational impact
It is important to note that ISBP refects a
consensus of standard banking practice
around the world in connection with the
examination of documents under
documentary credits. Ideally, many of
these practices would have already
incorporated in the daily activity of trade
fnance departments in banks. However,
experience proves that this is not always
the case. Therefore, its expected that
most banks will need to carry out an
operational review in order to ensure
they are aligned with the new ISBP.
Change is not made without
inconvenience, as Samuel Johnson
observed in 1755.
One particular problem Ive
encountered over the years since ISBP
was frst introduced has been that too
many practitioners regard ISBP as a
bank-only publication to assist bankers
in checking documents. No doubt this is
partially correct, but its often forgotten
that the ISBP is also an invaluable guide
for exporters in their preparation and
submission of documents. By
understanding how documents under
documentary credits are handled by
banks, exporters have the opportunity to
enhance compliance with the terms and
conditions of credits and thereby to
reduce discrepancy rates. Education in
the wider world, outside of the banking
environment, is essential to assure further
success with the ISBP.
With regard to ISBPs content, Ive
always considered it to be an essential
publication. However, my personal view
is that an even greater beneft could have
been realized if the remit of ISBP had
been widened. At the outset of the latest
ISBP revision, it was mooted that, in
addition to including additional
documents seen in most documentary
credits, it could also be advantageous to
create an additional section or sections to
cover various aspects of handling
documentary credits. Unfortunately,
insufcient feedback was received from
ICC national committees, and in March
2012 the plans for such an extension
were dropped. Perhaps this is one for
thefuture!
So what do we have in the latest
revision? The core features have been
retained, if not strengthened, and further
components have been added. Its not
the intention of this brief overview to
provide a detailed synopsis of all the
provisions of ISBP. Such an approach
would require a full one-day workshop,
which can, of course, be provided. For the
purposes of this article, I will concentrate
on a few key features of ISBP 745.
Usage of virgules (/) and commas
Ideally, certain grammatical usage,
including the use of virgules (/) and
commas would be fairly constant
globally, but this not the case. ISBP 745
provides clear guidance in stating that
usage of either a virgule or a comma
means that any combination of the
stated options, either singular or plural, is
acceptable.
Certifcates, certifcations,
declarations and statements
When certifcates, certifcations,
declarations and statements are required
by a credit, they are to be signed.
Whether or not they need to be dated
depends on the type of document
requested, its required wording and the
wording that appears in it.
Copies of transport documents
covered by UCP 600 articles 19-25
Articles 19-25 only refer to original
documents, not copies. Accordingly, a
copy is only to be examined under UCP
600 sub-article 14 (f ). Data need not be
identical but must not confict. Copies of
transport documents are not subject to
the default presentation period of 21
calendar days.
Correction and alteration
Its very important that corrections to
documents be handled in a consistent
way. ISBP clarifes the process for
benefciary and non-benefciary
documents, and additional interpretation
is provided concerning documents that
have been legalized, visaed or certifed.
Further, ISBP 745 explains that any
correction of data in a document issued
by the benefciary (with the exception of
drafts), or any correction of data in a copy
document, need not be authenticated.
Dates
The question of dates is contained in a
fairly detailed section and provides
concise information as to how dating
requirements for each type of document
are to be observed.
Documents for which the UCP 600
transport articles do not apply
In accordance with standard banking
practice, documents for which the UCP
July September 2013 9
600 do not apply include documents
commonly used in relation to the
transportation of goods, such as but not
limited to, delivery notes, delivery orders,
cargo receipts, forwarders certifcates of
receipt,forwarders certifcates of
shipment, forwarders certifcates of
transport, forwarders cargo receipts and
mates receipts. The implication is that a
condition in a credit that presentation is
to occur within a certain number of days
after the date of shipment will be
disregarded for such documents, and
that the default presentation period of 21
calendar days stated in UCP 600 sub-
article 14 (c) does not apply to them.
Expressions not defned in
UCP600
As practitioners know, a number of
common expressions used in credits are
not expressly defned in UCP 600, i.e.,
shipping documents, stale documents
acceptable, third party documents
acceptable, third party documents not
acceptable, exporting country,
shipping company and documents
acceptable as presented. ISBP 745 states
that these expressions should not be
used. Nonetheless, in the unfortunate
event they are, a meaning for each has
been provided in ISBP 745.
Language
This is a very important section, and all
parties to a documentary credit are
advised to pay close attention to the
content. In essence, when the language
of the documents is stipulated in the
credit, data are to be in that language.
When the credit is silent with regard to
language, documents may be issued in
any language. If the credit allows two or
more acceptable languages, the
confrming/nominated bank may restrict
the number of acceptable languages as a
condition of its engagement in the credit.
If it does not so restrict, then it is required
to examine the data in all of the
acceptable languages appearing in the
documents.
Mathematical calculations
When the presented documents indicate
mathematical calculations, banks only
need to determine that the stated total in
respect of criteria such as amount,
quantity, weight or number of packages,
does not confict with the credit or any
other stipulated document.
Originals and copies
Experience has proved that this is never
an easy subject in our technological age,
but its one that cannot be avoided. I
believe that this section of ISBP 745 will
be necessary guidance to the
identifcation of what is considered to be
an original or a copy.
Signatures
This section emphasizes that signatures
need not be handwritten and can be in a
variety of methods as defned in UCP 600.
It also notes that statements on a
document such as This document has
been electronically authenticated or
This document has been produced by
electronic means and requires no
signature or words of similar efect do
not, in themselves, represent an
electronic method of authentication in
accordance with the signature
requirements of UCP 600 article 3. An
important new addition is that a
statement on a document indicating that
authentication may be verifed or
obtained through a specifc reference to
a website (URL) constitutes a form of
electronic method of authentication in
accordance with the signature
requirements of UCP 600 article 3.
However, banks will not access such
websites to verify or obtain
authentication.
Conclusion
Of course, the ISBP is worthless if it is not
supported and promoted by those in the
trade fnance world. To paraphrase
Benjamin Franklin at the signing of the
Declaration of Independence in 1776, we
must all work together or, most assuredly,
we shall all hang separately.
I can only endorse the hope of Kim
Sindberg in the following article that ISBP
745 will be universally accepted as a
comprehensive tool providing added
value to practitioners involved in
documentary credits.
David Meynell is the owner of TradeLC Advisory
(www.davidmeynell.com), an independent trade
advisory and consultancy service. His email address is
davidmeynell@aol.com

ISBP 745 a signifcant milestone
by Kim Sindberg
At the ICC Banking Commission meeting
in Lisbon on 17 April, the new ISBP was
approved on a vote of 87-1. Only one
country, Singapore, voted no. In this
article, I will argue that ISBP 745 is a
signifcant milestone that will be helpful
to those working with documentary
credits on a daily basis be they
document examiners in a bank, export
ofcers in a production company or
persons working in an accounting
department.
Need for a new ISBP
The frst version of the ISBP, ICC
publication 645, dates back to 2002. The
following version, ISBP 681, was an
updated version intended to align it with
UCP 600. The current revision, ISBP 745, is
the frst version that provides a
comprehensive overview of international
standard banking practice for
documentary credits issued subject to
UCP 600.
Implementation of the new UCP gave
birth to new practices but not in one
stroke. For that reason it was correct to
merely update the ISBP in 2007 to bring it
in line with UCP 600, mainly in respect of
terminology. Likewise, it was a correct
decision some six years later to present a
new version of the ISBP in light of
documents and practices that UCP 600
as well as the related industries
have created.
Implementation date
One of the issues that caused controversy
is the absence of an implementation date
for ISBP 745, there is only a publication
date. Following its approval in Lisbon,
David Meynell
Volume 19 No 3 10
Gary Collyer stated that it was in force as
of 2007, i.e., when UCP 600 came into
efect. This, of course, is a provocative
statement: how can a publication be in
force seven years before its published?
A more nuanced way to look at this is
the following: in order to understand the
ISBP, one must look at the diference
between rules (UCP 600) and practices
(international standard banking practice).
UCP 600 article 2 includes the
following defnition of what constitutes a
complying presentation under a
documentary credit: Complying
presentation means a presentation that
is in accordance with the terms and
conditions of the credit, the applicable
provisions of these rules and
international standard banking practice.
This defnition provides a hierarchy of
tests concerning how to determine if a
presentation is compliant:
1) First, the wording of the
documentary credit. This means that any
condition in a documentary credit that
excludes or modifes the UCP 600
willprevail.
2) Second, the UCP 600.
Ideally, rules (in this case, UCP 600) are
static. They are the foundation for any
documentary credit issued subject
tothem.
3) Third, international standard
banking practice. The latter is the tricky
part. It is a catch-all phrase that includes
the preponderance of practices that
currently apply to a documentary credit.
These come from various sources ICC
Opinions, DOCDEX Decisions, court cases
AND the ISBP.
Practices, contrary to rules, are not
static. They move with the relevant
industry. Technology, processes, etc.,
change over time, and these changes
mean that practices change.
Some changes appear slowly; others
seem to come out of the blue. An
example of the latter is the signing of
transport documents by a branch of the
carrier. The original ISBP drafters did not
see this in the market when ISBP 645 was
drafted, but it was there when ISBP 745
was created
1
. This changed practice is
now documented in ISBP 745.
But when would a new practice be
applicable to a documentary credit
issued subject to UCP 600? One cannot
really say. Therefore, it makes no sense at
all talking about an in force or
implementation date for the ISBP. The
fact is that the world changes and that
changes the practice in diferent
industries, which has an infuence on
international standard banking practice.
An example can be found in the ICC
Opinions. In some cases, these have
changed. There are instances in which
new Opinions have overruled old ones. Is
this because the old Opinion was wrong?
No, generally it was because a practice
had changed.
The same principle applies to ISBP 745,
which is a selected collection of
international standard banking practices
as they exist right now. Most of the text is
the same as it was before, but much has
been expanded, elaborated upon and
clarifed, and, in a few cases, has changed
because practice has changed
2.
Old and new practices
ISBP 745 is more than twice the length of
ISBP 681, so there are a number of new
practices documented, and old
practices have been elaborated upon to
describe them in a clearer way. Here are
some examples:
The dating of certifcates
ISBP 681 paragraph 14 included the
following statement: Although it is
expected that a required certifcate or
declaration in a separate document be
dated, its compliance will depend on the
type of certifcation or declaration that
has been requested, its required wording
and the wording that appears within it.
The somewhat vague wording made it
hard to apply. Therefore, ISBP 745 has
restated it as follows: Whether a
certifcate, certifcation, declaration or
statement needs to be dated will depend
on the type of certifcate, certifcation,
declaration or statement that has been
requested, its required wording and the
wording that appears within the
document .
Indeed, ISBP 745 goes one step further
and ofers two examples: one in which
the dating of a certifcate is required, and
one where it is not, thereby making the
text easier to comprehend and apply.
Expressions not defned in UCP 600
The section of ISBP defning some of the
terms used in documentary credits, but
not defned in the UCP 600, has been
expanded to include third-party
documents not acceptable, shipping
company and documents acceptable as
presented. The other defnitions in past
versions of the ISBP have been
elaborated upon.
The invoice and the nature, classifcation or
category of the goods
One of the recurring challenges
document checkers face concerns the
description of the goods in the invoice.
The UCP 600 rule is that the goods
description in the invoice must
correspond with that appearing in the
documentary credit
3
. ISBP 745 ofers
more assistance than its predecessor in
applying the rule by stating that the
goods description in the invoice is not to
refer to a diferent nature, classifcation
or category of the goods than what is
refected in the documentary credit. It
includes two examples to illustrate
thispoint.
Instalment drawings or shipments
Also new to ISBP 745 is an elaboration of
language concerning the interpretation
of drawing or shipment by instalments
within given periods
4
. It has now been
made clear (again with examples) that
given periods are a sequence of dates
or timelines with a start and end date for
each instalment. A series of latest dates
are not given periods
5
.
Indication of name and address of delivery agent
at port of discharge
Sindberg: Implementation of the new UCP gave birth to
new practices
ISBP 745: the goods description
in the invoice (excepted)
C3 The description of the goods,
services or performance shown on the
invoice is to correspond with the
descriptions shown in the credit. There
is no requirement for a mirror image.
For example, details of the goods may
best be stated in a number of areas
within the invoice which, when read
together, represent a description of the
goods corresponding to that in
thecredit.
July September 2013 11
New to the ISBP is a paragraph stating
that when a documentary credit requires
a bill of lading to indicate the name,
address and contact details of a delivery
agent, at or for the port of discharge, the
address need not be one that is located
at the port of discharge or within the
same country as that of the port
ofdischarge.
These are just a few of the valuable
additions to ISBP 745.
Conclusion
ISBP 745 is a comprehensive work.
Documentary credit from experts the
world over have invested thousands of
hours in its creation. No doubt it is not
perfect. There may be points on which
reasonable people may disagree; after all,
this is a compromise fashioned by
representatives from many diferent
countries, so it would be strange if
everyone were to agree to everything.
My hope is that despite some
disagreements, ISBP 745 will be
universally accepted as a comprehensive
tool that brings undisputable value to the
people working on a daily basis with
documentary credits.
Kim Sindberg is Trade Finance Consultant at Sindberg
Consult. His e-mail address is kim@kimsindberg.com
1. In fact, two ICC Opinions were given on the subject at the same
meeting: TA 748 and TA 750rev were both approved at the ICC
Banking Commission meeting October 2011.
2. This is elaborated on in the blog-post The Second Unfair Yes-
Votehttp://www.lcviews.com/index.php?blog_id=67.
3. UCP 600 sub-article 18 (c).
4. UCP 600 article 32.
5. For more information refer to my article regarding UCP 600
article 32: The ambiguities in UCP article 32published in
DCInsight, Vol. 18 No.3, July-September 2012.
Expert commentary
Whats holding back electronic
presentation under L/Cs?
by Sarah Younger
Online trading is the name of the global
game in the 21
st
century. It would appear
that making purchases in a virtual mall is
no less enjoyable than visiting the
nearest real mall and, in many cases, also
cheaper. Most products can be bought
via websites, which enjoy massive
popularity. Of course, we are talking
about products that are often sent
directly to the purchasers from their
overseas production plants or from the
warehouses of local wholesalers
orretailers.
Technology has caused a revolution
that has resulted in increased efciency
in the production process, the shortening
of lead times and a reduction in costs.
Accordingly, one could expect that, in
tandem with the changes now occurring
on the global scene, paper-based
documentation will be replaced by
electronic documentation at a lightning-
quick rate. It is obvious to everyone that
paper documentation increases costs,
slows down procedures (even when sent
by courier) and is susceptible to loss and
errors. In other words, it simply fies in the
face of the transition to the brave
newworld.
Most surprisingly, even today, paper-
based documents accompany goods
from one place to another, which is
especially true for marine bills of lading
(B/L) and insurance certifcates (as a result
of their special status), as well as other
documentation, such as air transport
documents (AWB) and certifcates
oforigin.
Air transport
At the same time, something has
changed, at least in the feld of air
transport, with the announcement by the
IATA that it had set a target of 100%
e-AWB usage by the end of 2014. The use
of e-AWBs currently stands at just 15% of
transactions. State authorities, air
transport companies, forwarders, airports
and customs authorities are all involved
in the preparations to meet the
100%target.
The question that arises from the IATA
initiative is whether, even when the
implementation of e-AWBs is fully
completed, banks will continue to
demand an AWB, when in reality there is
only an e-AWB. Will exporters demand
paperwork from the carriers or the
forwarders (in addition to the e-mail) in
order to present it to banks under the
documentary credit when they have
already made the transition to a
diferentera?
Legislation and other preparations
What has already been done to prepare
for online operations?
1. Since the 1990s, many countries, with
the United States leading the way, have
passed legislation relating to electronic
commerce. From our perspective, as
people who deal with documentation,
one of the most important laws is the
Digital Signature Law. This law (verifed
and approved) has the objective of
ensuring the verifcation of the identity
of whoever sends an electronic
document, the verifcation of the
completeness of the document
(integrity) and the prevention of
repudiation (non-repudiation). This is
just as it would be upon presentation
of a paper document.
2. International organizations, such as the
UNCITRAL, created the Model Law on
Electronic Commerce (MLEC), which is
a model for the legislation enacted by
countries on the subject. In 1996, the
United Nations Economic Commission
for Europe (UNECE) published the
United Nations Electronic Trade
Younger: this is a change we will not be able to resist
Volume 19 No 3 12
Document (UNeDocs), which proposed
an integrated concept of paper
documents and electronic documents
on an XML or EDIFACT basis.
3. In 2002, ICC distributed the eUCP,
which is the supplement to the UCP for
electronic presentation. The eUCP
provides helpful defnitions of the
terms that have diferent
meanings in the electronic
and paper worlds, such as
place for presentation and
sign. It also addresses key
issues of electronic
presentation such as the
format in which electronic
records are to be presented,
how original documents are
to be defned and what
happens when an
electronic record is corrupted by a virus
or other defect. In particular, it enables
the presentation of mixed documents
(paper and electronic), making it
possible to present paper-based
documentation and electronic
documents within the framework of
the same documentary credit.
4. In the 1990s, a number of business
entities, including banks, adopted a
format for electronic transmissions
the Electronic Data Interchange (EDI).
This method of communication has
already been implemented between
the parties to commercial transactions
and between those parties and their
banks. However, this has not become a
channel of communication used
between banks.
5. An additional option for presentation
electronic documents is via banks
portals. Various banks have developed
the ability to receive electronic
documentation from their customers
thru the portals.
Obstacles
So why are we not seeing electronic
documentary credits in our operations?
The reason lies in the fact that there are
still obstacles present in a number of
felds and they are not minor ones: legal
obstacles, the need for investment in
technological infrastructure,
bureaucracy and not a little
conservatism on the part of the parties
involved importers and exporters as
well as banks.
For the following reasons, there has
been an absence of a sufcient legal
response:
Recognition of the acceptability and the
validity of electronic documents The
critical question is whether the courts
will accept an electronic document as
evidence. A concern arises that even if
a court in CountryA were to recognize
an electronic document as acceptable,
the evidentiary weight attached to it
could be diferent from that in Country
B. The chances of a reasonable banker
or exporter having advance
knowledge of the law that
applies concerning the
recognition of an electronic
document as evidence in
every country to which they
export are extremely remote.
Verifcation of the
authenticity of an electronic
document (the original copy)
There are those who claim
that an electronic document
is created on the senders computer,
whereas a copy of the original
document is created on the recipients
computer. This subject is of
considerable importance, primarily
concerning the special status of the
marine bill of lading as a negotiable
document that afords its holder the
right to possess the goods. In addition,
the ability to duplicate electronic
documents with considerable ease
requires us not to waive the paperwork
that is customary at present until a
solution is found for this issue. The
status of a maritime insurance
certifcate is similar.
The retention of electronic documents
Standards do not exist in every country
regarding the need to retain electronic
documents. These standards link the
identity of the party to a transaction
required to retain them, the manner of
proving that the copy retained is true
to the original, as well as other issues.
The determination of the prevailing law
and the judicial authorities In the
event of a dispute concerning the
documents between commercial
parties based in diferent countries, it is
not obvious which legislative
framework will prevail and which
judicial body will have jurisdiction in a
case in which a document is sent
during the course of a transaction by
Party A in Country A and received by
Party B in Country B, after having
passed through a number of routing
switches (each in a diferent country,
none of which is in A or B) in a
communications network.
An orderly defnition of criminal activities
The crime of impersonation, which is
not a new one, is already causing
considerable damage, with criminals
impersonating suppliers and
customers on the Internet. With
documents at stake, this issue is crucial
for electronic documents presented
under documentary credits.
Investment in the appropriate
technological infrastructure The
obstacle from this perspective derives
from the need for a signifcant fnancial
investment by importers, exporters
which, in many cases, are small- and
medium-sized companies in
developing countries and the banks.
Bureaucracy bilateral agreements
between banks One of the
requirements that banks will have to
comply with is the signature on
bilateral agreements with each and
every one of the banks used by the
other parties in the documentary credit
transactions they handle. These
agreements are intended to include
sections that cover the responsibility of
the banks that send the transmission
for example, responsibility for verifying
the identity of the sender of the
original electronic document to the
bank (sometimes the presenter is not
the benefciary of the credit, the banks
customer, but the forwarder or the
shipping company). These concern the
completeness of the transmission,
aspects relating to data security and
other elements that involve various
technological issues.
Conclusion
Dr Alan Davidson, in his article Electronic
Records in Letters of Credit, wrote: The
history of mercantile law and practice
shows us that either by stealth or by trial
and error, the commercial parties make a
due assessment of the risk at all levels
and proceed onto their perceived
respective commercial advantages.
The point is that the attachment by
some bankers to the continued use of
familiar methods is also shared by our
customers. Why should we jump when
we are not being pushed? Despite the
problems that still exist, and which one
cannot ignore, there can be no doubt but
that in the not-too-distant future, reality
will overcome conservatism, and this is a
change we will not be able to resist.
Sarah Younger is the Head of International Trade
and Payments at Bank Leumi Le-Israel. She is also the
Chair of the ICC-Israeli Banking Committee. Her e-mail is
sarahy@bll.co.il
In the not-too-
distant future,
reality will
overcome
conservatism
July September 2013 13
Special report: Islamic banking
Shariah banking and trade fnance
by Michael Peiris
The following core concepts are
the basics of an Islamic trade
module that is being widely
discussed and reported to have
been put into practice by several
countries. In view of the apparent
successes achieved by various
banks in diferent parts of the
world, especially the countries
where Shariah law is in force,
there is a demand in other
countries to provide banking
facilities that are in line with
Shariah banking.
Taking into consideration the large trade
volumes routed through banks by clients
practising the Islamic religion, a number
of banks from non-Muslim countries
including Sri Lanka have provided a
window for Shariah-compliant banking.
The number of banks ofering this, as well
as the number of customers relying on
Shariah banking, is expected to increase
in the years to come. In this context, it
would be useful to discuss Shariah
banking in order to understand future
banking needs, especially with regard to
trade fnance.
Some of the relevant terms are as
follows:
1. Murabah sale of goods to another
party for a price that includes the cost
and a mutually agreed proft;
2. Musharakah partnership with proft &
loss sharing. All parties in this
agreement provide capital and share
proft in a mutually agreed ratio and
losses in the ratio of their capital
contribution;
3. Wakalah agency arrangement: One
party appoints another party to
perform certain tasks for the beneft of,
and at the risk of, the principal;
4. Zaman a payment or performance
guarantee issued in support of a third
party;
5. Istisna sale of goods with deferred
delivery: payment made either upfront
or in installments, for delivery of goods
at a future date according to
specifcations and time frames agreed
between the parties concerned.
Import fnance
Article 2 of UCP 600 says that an issuing
bank is permitted to establish letters of
credit on its own behalf. This provision
allows banks to import goods consigned
to them and to have the absolute
ownership of the goods. For many years,
there has been a regulation in Sri Lanka
that goods could be consigned to the
order of a local bank for both export and
import transactions. This regulation,
although no longer a hard-and-fast rule,
has now become an accepted practice in
Sri Lanka. Almost all of Sri Lankan banks
continue to call for bills of lading drawn
to their order with an underlying interest
to retain title to the goods in a trade
transaction. The provisions contained in
UCP 600 and the prevailing practice in
the market have created an ideal
situation for Murabah fnancing in
SriLanka.
Murabah fnancing
The concept behind Murabah fnancing
allows one party to sell goods to another
party with an agreed proft. It goes
without saying that one must frst own
the goods to make a sale.
In a scenario in which goods are
consigned to the order of a bank, the
ownership of the consignment
automatically remains with the bank. In
another words, the bank retains the title
to the goods with an option to transfer
them in consideration of a sale price,
thereby transferring the ownership of the
goods to a prospective buyer.
With regard to letter of credit
transactions, the importer comes to an
agreement (Wakalah) with the bank to
purchase goods from the bank that has
imported under its name as per the
requirement of the buyer. This agreement
is more or less similar to that of the letter
of credit application used by banks for
opening letters of credit. The Wakalah
(agreement) will permit the importer to
act as the agent of the bank to source the
merchandise and negotiate terms as
desired by him. This method will also
allow the buyer to remain competitive in
the market in terms of price, quality and
timely delivery of goods.
In this type of transaction, a bank also
might consider a total fnancing facility
without any other collateral, and, for its
trustworthy corporate and retail clients,
may only be content with title to the
goods. In fnancing this kind of
transaction, a bank may work out its
funding costs depending on the duration
of the facility and the volatility of
currency involved in the transaction, and
may include a percentage of proft after
taking into account the cost and the risks
involved.
Musharakah fnancing
Musharakah fnancing is a concept that
supports an arrangement to share proft
and loss in a transaction. Under a
Musharakah arrangement, the parties
involved contribute capital, share proft in
a mutually agreed ratio and take losses in
the ratio of capital contributed. This
method of payment can be conveniently
applied to facilities based on collateral in
the form of either cash or assets (movable
or immovable).
In an L/C transaction where a certain
percentage of a cash margin is used as
collateral, the bank would expect a lesser
percentage of proft than that from an
L/C opened with no margin. In the event
the bank decides for any reason to
dispose of the goods due to non-
payment by the importer, in order to
reduce the loss incurred by the bank, the
importer can either forego its entire share
of the margin or a portion of it placed at
the time of opening the letter of credit.
When a bank decides to fnance the
entire import transaction under
Peiris: A Shariah fnancing module could be adopted
without deviating from existing practices
Volume 19 No 3 14
Musharakah, it can go to the extent of
retiring the import bill through import
fnancing, adhering to its concept of
sharing proft and loss. Under normal
circumstances, a bank may consider
granting an import loan (trust receipt/
pledge loan) for an agreed percentage of
the value of the goods.
Application of customary import
fnancing in the form of Musharakah
fnancing for the beneft of the sectors
that wish to avoid borrowing on interest
is possible and may even be encouraged
for the growth of the banking industry.
However, there appears to be a
misconception among practising bankers
that once the bank and the customer
sign an agreement (Istisna) using the
Musharakah fnancing concept, the
agreeing parties cannot deviate from the
original agreement. In reality,
the customer might face a
situation where he would fnd
it difcult to dispose of the
goods held in pledge due to a
price fuctuation in the
market. In such a situation,
selling the goods at the
agreed date might force both
the bank and the customer to
take a huge loss, since both
have agreed to share the
proft and the loss. To meet such
contingencies, the agreement could
make a provision to extend the facility
further for a mutually agreed period.
D/A and D/P
Not only letters of credit but also
documents for collection on both D/P
(Documents against Payment) and D/A
(Documents against Acceptance) can be
accommodated under either Murabah or
Musharakah fnancing. It all depends on
the agreement between the bank and
the client. If the importer wants to
purchase the goods relating to the
documents sent to the bank for
collection, he need only agree with the
bank that the goods will be consigned by
the suppliers to the order of the bank.
The Uniform Rules for Collection (URC 522)
in article 10 provide specifcally for this
type of arrangement, which stipulates
that goods should not be dispatched
directly to the address of a bank or
consigned to, or to the order of, a bank
without prior agreement on the part of
that bank.
Under Murabah import fnancing, a
bank will deliver the documents against
payment of the bills value plus its proft
(commission). In the case of customers
who need time to settle bills, a bank may
consider either a trust receipt or a pledge
facility against a Zaman (guarantee)
undertaking to pay within a specifc
period or against an Istisna agreement,
thereby undertaking to pay in
installments on a deferred date.
Export fnance: Murabah
The concept of Murabah is to sell goods
for a proft at a mutually agreed price. In a
typical post-shipment fnance
transaction, an exporter has his bill
discounted/purchased by his bank to
meet the working capital requirements
necessary to continue his export
business. In this situation, banks will
credit proceeds arising from the bills after
taking their proft by way of discounts.
This is not an unusual phenomenon, but
an ongoing international
practice.
Generally, the discounting
facilities are granted after
making due assessment of
the clients, buyers,
commodities and the political
and economic situation of the
buyers country. These salient
features will continue to play
a major role even under
Murabah fnance, since the
emphasis in this type of transaction is on
making a proft, and any deviation from
standard practice can have a negative
impact on the proftability of a
transaction.
Meanwhile, banks will continue to
retain title to the documents until the
fnal buyer pays the bill and takes charge
of the documents. Generally, the bills that
are not under letters of credit are
discounted/purchased with recourse to
the sellers (exporters). This too can be
retained under Murabah through a bill of
exchange or by obtaining a general letter
of indemnity equal to a Zaman
undertaking to pay the bill in case of
default by the buyer. The undertaking
usually provides for the bank to dispose
of the goods to any other party to reduce
its losses.
Export fnance: Musharakah
The concept behind Musharakah
fnancing is to share proft and losses in a
transaction. In an export transaction
where payment is arranged through a
confrmed letter of credit or against a bill
of exchange avalised by a bank, the
Musharakah concept can be put into
practice without making any major
changes to the prevailing procedure.
In view of the secured nature of the
transaction, banks would likely be willing
to ofer attractive rates for the purchase
of bills under letters of credit and bills
avalised by the buyers bank. Hence, the
seller will receive more proft from the
transaction than from a transaction
referred to in the previous paragraph.
Under this type of transaction, a bank
might be willing to take less proft, taking
into account the secured nature of the
transaction. This fnancing is arranged
without recourse to the exporter, and
therefore the exporters loss is greatly
minimized.
The Shariah concept can be applied
for pre-shipment as well as post-
shipment fnance. The most common
facility obtained by exporters at the pre-
shipment stage is a packing credit. In a
packing credit agreement, an exporter
agrees to buy the raw materials for
manufacture of the goods with bank
fnance and sets of the fnancial facility
with the proceeds of the export bill
presented to the bank for purchasing or
discounting. This type of conventional
pre-shipment facility may be structured
in a manner described in Istisna, whereby
the bank agrees to pay upfront for the
goods the exporter agrees to sell to it in
the form of presentation of documents at
a future agreed date.
Conclusion
A Shariah fnancing module could be
adopted to fnance international trade
without deviating from existing practices.
I believe any process can successfully be
implemented if there is a level playing
feld. To create one for trade transactions
requires considerable time and efort by
the parties involved, especially in an
environment in which commodity prices
are determined by market forces.
Although one would expect that
equivalent goods in diferent countries
would cost the same in a free market
after conversion into a particular
currency, in practice this is not the case.
Therefore, the proft opportunities from
cross-border trade are limited.
Unless it involves a forward exchange
contract, fxing a proft in advance for a
facility in an international trade
transaction will not create a level playing
feld. When entering into a forward
exchange contract, a bank might tend to
fx an unusually increased volatility rate
for the currency in a transaction to ensure
that it would not lose its proft margin.
This might force the importer under
Shariah to either withdraw from the
the proft
opportunities
from cross-
border trade are
limited
July September 2013 15
market or abstain from selling, as he may
be unable to compete with other
importers who are free to dispose of their
goods at a lesser price and still have a
proft. This requires the attention of
theparties when entering into
anagreement.
Michael Peiris is a banking consultant with the
International Chamber of Commerce in Sri Lanka. His
e-mail is michael.peiris@yahoo.com
Guarantees and standbys
Cleaning counter-
undertakings
by Jim Barnes
This article focuses on counter-
undertakings and the potential
risks of their establishing liabilities
beyond their terms and conditions
or their incorporated ICC rules.
ISBP Model Counter Standby
The ISP98 model counter standby
(available at www.iiblp.org)
1
recites at the
outset: At the request and for the
account of [name and address of
applicant] (Applicant), we [name and
address of issuer at place of issuance]
(Issuer) issue this irrevocable standby
letter of credit number [reference
number] (Counter Standby) in favour of
[name and address of benefciary]
(Benefciary) in the maximum aggregate
amount of [currency/amount]. This is a
counter standby letter of credit
supporting Benefciarys issuance of its
separate [local bank] undertaking in the
form of the Annexed Local
Undertaking .
The ISP98 counter standby form
includes an annex that provides the
wording of the local bank undertaking,
including the following: On the
application of [counter standby
applicants name and address], [counter
standby issuers name and address] has
issued to us a standby letter of credit
supporting our issuance of this
undertaking to you.
The ISP98 counter standby form refers
to the local bank undertaking in
specifying what the local bank as
benefciary must include in its statement
when drawing under the counter
standby. The form does not include an
instruction, or an express request, that
the benefciary issue its local bank
undertaking, although a request for such
issuance might be implied.
URDG 758 Model
Counter-Guarantee
The URDG 758 model counter-guarantee
in ICC Publication 758 recites at the
outset: Please issue under our
responsibility in favour of the Benefciary
your guarantee in the following
wording:.
The URDG 758 form of counter-
guarantee includes wording for the local
bank undertaking. The form indicates
that the applicant for the counter-
guarantee should be named the
Applicant for the local bank guarantee
and that the guarantee should require
presentation of a document mentioning
the applicants breach of an underlying
obligation. (This form does not otherwise
indicate who is the counter-guarantors
applicant.)
URDG 458 Model
Counter-Guarantee
ICC Publication 631 provides a guide to
URDG 458 includes fve ICC model forms
entitled INSTRUCTIONS TO A
CORRESPONDENT BANK FOR THE ISSUE
OF A [TENDER/ PERFORMANCE, ETC.]
GUARANTEE AGAINST A
COUNTER-GUARANTEE.
Each URDG 458 form recites at the
outset: At the request of ____________
please issue on our responsibility in
favour of ____________ your guarantee
in the following wording:
Each URDG 458 form includes wording
for the local bank guarantee that
identifes a Principal and the underlying
obligation of the Principal to the
benefciary of the local bank guarantee.
That wording also includes the following:
At the request of the Principal, we (name
of bank) hereby irrevocably undertake to
pay you .
Each URDG 458 form, after describing
the requested local bank guarantee,
states: In consideration of your issuing
your guarantee as above we hereby give
you our irrevocable counter-
guarantee.
The URDG 458 model forms, like the
rules, have been superseded by the
newer, and improved, URDG 758 rules
and forms. They are mentioned here and
discussed below because some counter-
undertakings, whether or not issued
subject to URDG 458, include some of
their worrisome features. In this regard,
the concerns discussed below depend
more on wording than incorporated
rules, and no incorporated ICC rules, not
even ISP98 Rule 4.21 (Request to Issue
Separate Undertaking),[2] can completely
ofset wording that establishes a new
underlying obligation of the issuer or
applicant or both to reimburse or
indemnify a local bank outside the terms
and conditions of the
counter-undertaking.
Risks to issuer and applicant to
reimburse or indemnify the
localbank
There is a risk that applicable law might
characterize a request to issue a
guarantee as establishing implied
reimbursement/indemnifcation
obligations outside the terms and
conditions of the counter-undertaking
accompanying the request. That might
lead to a characterization of the counter-
undertaking as support for these implied
obligations of the issuer (or applicant), so
Barnes: I view the inclusion of under our responsibility
wording as undesirable
Volume 19 No 3 16
that even if the counter-undertaking
expired, the local bank could claim
unexpired legal rights of reimbursement/
indemnity. The text of the accompanying
counter-undertaking, including
incorporated practice rules, will afect the
extent of the risk. So, with these risks in
mind, both the issuer of the counter-
undertaking and the issuers applicant
should review the issuers
communications to the local bank and
the applicants authorization of those
communications.
Undesirable wording
I view the inclusion of under our
responsibility wording in the URDG 458
and 758 forms as undesirable. These
words were presumably based on URDG
458 sub-article 2 (a) (ii). URDG 758 was
improved in this regard and presumably
did not intend to provide for any
additional or unqualifed responsibility
of a bank issuing a counter-guarantee.
I view as undesirable a request that the
local guarantee recite that it is issued at
the request or for the account of the
applicant for the counter-undertaking. As
indicated in ISP98 Form 6, the requested
or expected undertaking should be
worded to indicate that it results from
and relies on the counter-undertaking. It
may be necessary to include in the
counter-undertaking or separate inter-
bank communication wording that
obligates the issuer or applicant to pay
the local banks charges or to indemnify
against foreign laws. If such obligations
are to be stated rather than left to
incorporated rules such as URDG 758
articles 31 and 32, UCP 600 article 37 or
ISP98 Rule 8.02, then it would be
desirable to limit these exceptions by
adding an express provision, such as
appears in ISP Rule 4.21 (Request to Issue
Separate Undertaking).
L/C bankers appreciate that counter-
undertakings issued subject to ICC rules
are independent and are expected to
provide for certainty of the rights and
obligations of the two banks involved,
leaving it to the commercial parties to
resolve any uncertainties in the efect on
them of the inter-bank arrangement
when they resolve disputes between
themselves based on their underlying
relationship.
The practice of banks worldwide for
many years has been to treat the terms
and conditions of counter-undertakings
as the exclusive basis for determining the
rights and obligations of the bank issuer
and the local bank benefciary. The risks
and undesirable wording discussed
above have not increased, to my
knowledge, and should not increase, the
liabilities of issuers of counter-
undertakings or their applicants. Proper
application of the L/C independence
principle should ofset these risks.
Accordingly, I write this, not to predict
or encourage disputes, but to encourage
better drafting of counter-undertakings,
including their descriptions of the local
bank undertakings they intend
tosupport.
Jim Barnes is Senior Counsel at Baker & McKenzie LLP,
Chicago, Illinois. His e-mail is
james.barnes@bakermckenzie.com
1. Eight ISP98 standby forms with extensive endnotes were
released in 2012 by the Institute of International Banking and
Practice and are available as Word documents on its website at
www.iiblp.org. They were the subject of my January-March
2013 DCInsight article on improving the drafting of
undertakings to achieve independence. They include the ISP98
Form 6 Model Counter Standby with Annexed Form of Local Bank
Undertaking, which is available at www.iiblp.org by clicking
on ISP Forms and then ISP98 Model Form 6-Counter Standby.
2. SP98 Rule 4.21 (Request to Issue Separate Undertaking): If
a standby requests that the beneciary of the standby issue
its own separate undertaking to another (whether or not the
standby recites the text of that undertaking): a. the beneciary
receives no rights other than its rights to draw under the standby
even if the issuer pays a fee to the beneciary for issuing the
separate undertaking); [This rule 4.21 is the clearest of the
ICC rules on the point that the issuer of a counter-undertaking
is liable solely on its counter-undertaking and has no separate
liability for requesting (which would include, instructing,
ordering, authorizing, etc.) the beneciary to issue an
undertaking].
The UCP in court
The governing law of an L/C
by King-tak Fung
UCP 600 does not prescribe the
governing law of an L/C. Nor does it
indicate the jurisdiction that the parties
can submit their case to in the event of a
dispute. In practice, a vast majority of
L/Cs do not provide any governing law or
jurisdiction clause.
The objective of this article is to
highlight how some courts rule on the
governing laws of L/Cs and the factors
they may take into account in
determining the jurisdiction issue. This is
by no means a conclusive or exhaustive
overview, as each case depends on its
own facts and the laws of individual
countries.
Key issues
The test
At common law, in the absence of an
express or implied choice of law, the
proper law governing a contract is the
system of law with which the contract
has the closest and most real connection.
In Sinotani Pacifc Pte Ltd. v Agricultural
Bank of China (ABC)
1
, with regard to the
contract between the issuing bank and
the benefciary, the Singaporean court
was of the view that the contract was
most closely connected with the place of
payment against documents under the
L/C. Accordingly, the law of the place of
payment against documents under an
L/C was determined to govern the
contract between the issuing bank and
the benefciary.
The place of payment
The relevant terms of the L/C (in SWIFT
format) in this case were as follows:
31D: date and place of expiry: 28
February 1996, Singapore
41D: available with: Agricultural Bank
of China, by acceptance
42C: drafts at: 180 days after sight
42A: drawee: Agricultural Bank of
Chinas branch in Dalian, China
47A.5: Each drawing under this credit
must be presented to Royal Bank of
Canada Singapore Branch, which holds
special arrangements for reimbursement
and document forwarding.
78: All drafts drawn under and in
compliance with the terms of this Credit
will be duly honoured on presentation at
Agricultural Bank of China and
drafts accepted within the terms of this
credit will be duly honoured at maturity.
The benefciary argued that
Singaporean law should apply, because
Conditions 31D and 47A.5 above
suggested that the documents were to
be presented by the benefciary in
Singapore for payment. But the court did
not accept this argument. The judge
explained that even though these
conditions contemplated presentation of
documents to the Royal Bank of Canada
July September 2013 17
in Singapore, that bank had no authority
under the terms of the L/C to accept the
documents on behalf of the issuing bank
in Singapore for payment.
By contrast, the court held that, under
the terms of the L/C, the benefciary was
required to present the documents to the
issuing bank in China for acceptance and
payment, as the credit was available with
the issuing bank by acceptance.
Therefore, the L/C was held to be an
unconfrmed straight credit, and the
place of payment against documents
under the L/C was held to be in China.
In this regard, the judge said:
Conditions 41D, 42A and 42C of the
credit [see above], which stipulated that
the credit was to be available with the
[issuing banks] Dalian branch by
acceptance of drafts at 180 days after
sight, entailed that payment, in the sense
of honouring drafts drawn under the
credit, could only be made by [the issuing
bank] in China As for the place of
payment against documents under the
L/C, this would likewise be China since
the documents were to be presented for
acceptance in that country and since the
wording of Conditions 41D, 42A and 42C
indicated that payment under the L/C
could only be made by [the issuing bank]
from its branch in Dalian.
Refusal of payment and the
negotiation credit
Could ABC refuse payment under the L/C
on the ground of the Chinese court
order? The Singaporean court held that
the contract between ABC and Sinotani
was governed by the laws of China, being
the law of the place of payment against
documents under the L/C. It followed
that ABC was entitled to refuse payment
to Sinotani under the L/C due to the
Chinese court order.
Would the courts decision about the
governing law of the L/C have been
diferent if the L/C had been a
negotiation credit? In another
Singaporean case, Agritrade International
Pte Ltd. v Industrial and Commercial Bank
of China (ICBC)
2
, ICBC, the issuing bank,
was ordered by a PRC court not to pay
the benefciary under an L/C. The L/C in
this case was available by negotiation
with the advising bank in Hong Kong. The
issuing bank argued that the governing
law of the L/C was Chinese law (i.e., the
place of the issuing bank) and that it was
entitled to refuse payment by reason of
the PRC court order.
The Singaporean court rejected this
argument and held that the L/C was a
negotiation credit available with the
advising bank in Hong Kong. Having
regard to the availability of the credit, the
court held that the contract between the
issuing bank and the benefciary was
governed by the laws of Hong Kong
(being the place where the benefciary
was entitled to present documents for
obtaining payment under the
negotiation credit).
The court further explained that: The
proper law governing a cross-border
bankers L/C was the law of country
where the benefciary was entitled to
present the documents and become
entitled to payment, unless some other
law was expressly provided for. When a
credit provided for negotiation in a
country other than the country from
which it emanated, the
benefciary impliedly
intimated that he did not
wish to be bound by the law
of the country of origin of
the credit. The opening
bank, by agreeing to issue
the credit, impliedly
accepted such intimation. In
the present case the proper
law of the credit was Hong
Kong.
Accordingly, ICBC was
ordered to pay for the L/C drawing
irrespective of the Chinese court order, as
the governing law of the L/C was held to
be Hong Kong law instead of Chinese
law.
Other issues
Would the governing law have been
diferent if the nominated negotiating
bank had not confrmed or negotiated
the L/C? In an English case, Marconi
Communications International Ltd. v PT
Pan Indonesia Bank Ltd. TBK
3
, the facts are
very similar to those of the
Agritradecase.
The court held:
24.
ii) The credit was available by
negotiation and SCB was contemplated
by the credit as the (or one of the)
negotiating banks. Although SCB did not
in the event negotiate the credit, it acted
as collecting bank in checking and
forwarding the documents and
requesting payment to its own London
account.
iii) Panin Bank [the confrming
bank in Indonesia] undertook to
reimburse SCB if SCB negotiated the
documents.
25. In short, it was contemplated that
the credit would be communicated in
this country [England] and become
efective here, that the documents would
be presented here and payment would
be here. It does not seem to me to be a
matter of great signifcance in
considering the application of art. 4 [of
the Rome Convention] taken as a whole
that SCB did not add its confrmation. The
availability of SCB as a negotiating bank
would give rise to the same closeness of
connection with England. The
performance characteristic in those
circumstances would remain the
provision of the banking service in the
form of payment on presentation of non-
discrepant documents. Given the
availability of negotiation in that form, it
would be contrary to the requirement of
avoiding the governing law
being dependent on the mode
of negotiation chosen to
contemplate that a diferent law
would govern in the event
negotiation did not take
place .
30. I fnd that the claimants
have made out a good arguable
case that the contract between
the confrming bank (Panin
Bank) and the benefciary
(Marconi) was governed by
English law, since a chosen method of
performance was by way of negotiation
of the documents at the ofces of the
advising bank in London with payment in
sterling. Any other conclusion would give
rise to the very great inconvenience
contemplated by Mr. Justice Ackner. This
conclusion cannot be afected by the fact
that, in the event, the documents were
not negotiated by the advising bank but
were forwarded to the confrming bank
as a collecting bank with the request that
payment be efected in London.
Fung: a vast majority of L/Cs do not provide any
governing law
the governing
law should
be the place
of availability
of the L/C
Volume 19 No 3 18
Comments
Based on the above cases, it appears that
the governing law of an L/C should be
determined by the place of availability of
the L/C. In a negotiation credit, the
governing law will be the same, despite
the fact that the nominated bank has not
confrmed the L/C or negotiated the
presented documents.
In the Sinotani case, the decision is
sound, since the L/C was available by
acceptance at a branch of ABC in China.
Note that Singaporean law would apply if
the L/C were available by acceptance
with a bank in Singapore and the draft
were drawn on the accepting bank.
King-tak FUNG is a Partner and Head of Banking &
Finance, Asia of Eversheds Hong Kong, Co-chair of the
ICC Consulting Group on the latest ISBP revision, a
member of the ICC Consulting Group on the UCP 500
revision and forfaiting, author of Leading Court Cases on
Letters of Credit (www.iccbooks. com) and UCP 600
Legal Analysis and Case Studies (www.peer.com.hk).
His e-mail is ktfung@eversheds.com
1. (Singapore).
2. [1998] 3 SLR 211.
3. [2004] 1 Lloyds Rep. 594.
Insurance documents
Negotiation, transfer and assignment
in cargo insurance documents
by T.O. Lee
In UCP 600, the following three concepts
indicate that a party expresses its intent
to pass on (a) its title, (b) performance
obligations and (c) rights to another
party: (1) negotiation, which is defned in
UCP 600 article 2 but is restricted to
drafts and a compliant set of documents;
(2) transfer, which is defned in sub-article
38 (b) and for which the benefciary
passes on its performance obligation (to
make delivery) only to another party, but
which includes the right to make
presentation and to receive payment
under the credit; however, this sub-article
is silent on the transfer of other rights
and title of the goods; and (3)
assignment, which is not defned in UCP
600 but is governed by article 39; here
the benefciary passes on only the right
to receive payment, not the performance
obligation (such as to make delivery) that
still rests with the benefciary.
Cargo insurance documents
Some L/C practitioners assume that bills
of exchange, bills of lading and cargo
insurance documents are all negotiable
instruments. Hence, they expect these
documents to follow the same rules for
transfer of title or ownership,
performance obligations and rights. As a
result, their credits will require the cargo
insurance certifcate or policy to be
issued or made out in negotiable form.
In addition, they may believe that
words used in bills of exchange and bills
of lading such as to order, to order of
or to or order with endorsements
indicate that the document is in
negotiable form. But they may not
realize that cargo insurance documents
by their nature are diferent from bills of
exchange and bills of lading.
In the UK Bills of Exchange Act 1882
(BOE Act), which is a model for many
other laws, the concepts of negotiation,
to order, indorsement, holder in due
course, etc., are introduced in Articles 31
to 38. In the Hague-Visby Rules, Brussels
Protocol 1968 , which most bills of lading
are subject to, the concepts of holder
(Article I b), title (Article III 7), non-
negotiable (Article VI) rights and
obligations (Articles VI & VIII) are set
forth. In the Marine Insurance Act 1906 of
the UK (MIA), also a model for many other
laws, the concepts of assignment
(Article 15) and right to sue in his own
name (Article 50 2) are stated. Here
Negotiations (Article 20) is used to
mean discussion only in negotiations
for the (insurance) contract; it does not
mean passing on of title, performance
obligations and rights as negotiation is
used in the BOE Act or the Hague-Visby
Rules.
To summarize, referring to the BOE Act
and the Hague-Visby Rules, negotiation is
used in bills of exchange and bills of
lading to allow parties to pass on (a) title
or ownership of goods, (b) sum certain
in money (defnition in the BOE), (c)
performance obligations and (d) rights.
But in cargo insurance, under the MIA,
there is no concept of negotiation, only
the concept of assignment to allow the
parties to pass on rights to claim,
including the right to sue the insurer in
his own name in Article 50. There is no
passing of title, ownership or sum certain
in money. The title or ownership to be
passed on by endorsement of a bill of
lading and the passing of sum certain in
money is to be made by endorsement of
drafts. This is not the purpose of a cargo
insurance document.
Credits
Hence, it is clear that a cargo insurance
document should only be assigned but
not negotiated. Therefore, in my view a
credit should not use misleading words
like insurance document in negotiable
form; it could use a more accurate term
in assignable form but this is also
superfuous, since the MIA has already
included this.
The MIA has no provision to govern
how assignment is to be done, by
endorsement or otherwise. It is the
partys free choice provided it is legal. The
assured may use a letter of assignment
attached to the policy or certifcate or
simply make a signed statement to this
efect in the policy or certifcate.
As to a bill of lading, it is not
negotiable unless the consignee box is
either left blank (rarely seen now) or
made out to order. This means the right
to negotiate by endorsement has to be
Lee: a cargo insurance document should only be assigned
but not negotiated
July September 2013 19
authorized by the shipper. But according
to the MIA Article 50, the insurance policy
or certifcate is automatically assignable
unless expressly prohibited, and
assignment may occur before or after the
loss, i.e., the assured can assign even if
the policy or certifcate is not made out
to order. In other words, all policies and
certifcates are automatically assignable,
whether or not authorized by the insured,
because under common law, a person
(legal or natural) has the basic, if not
constitutional, right to assign his/her
ownasset.
There is also no need for the credit to
require the insurance document to cover
warehouse-to-warehouse risk, as this is
automatically included in Institute Cargo
Clauses (A), (B) and (C) under Article 8.1.
ICC Banking Commission opinions
state that if the policy has warehouse-to-
warehouse cover, the issuing date of the
policy may be later than the shipped on
board date. It follows that all insurance
policies subject to Institute Cargo Clauses
(A), (B) and (C) would be automatically
compliant as far as the issuing date
isconcerned.
T. O. Lee FAE MCIArb MITD is an accredited court expert
and consultant in LC, CPBL, cargo policy and frauds
thereof under UCP 600. Please click www.tolee.com for
details. His e-mail address is experts@tolee.com.
Multilateral development banks
The Asian Development Bank and
trade fnance
by Steven Beck
The Asian Development Bank (ADB)
published a study in Q1 this year
indicating that there is a $1.6 trillion
global gap, meaning unmet demand, for
trade fnance, $425 billion of which is in
developing Asia. These are big numbers.
To give them some meaning, ADB
surveyed over 300 companies to ask: If
you had more trade fnance available,
would you increase production and hire
more people? In response, companies
said that if they had access to 5% more
trade fnance, they would increase
production by 2% and hire 2% more staf.
They also said that if they had access to
10% more trade fnance, production and
stafng would go up by 5%. If one
extrapolates these numbers over the
global economy, or just developing Asia,
the impact on economic growth and job
creation would be huge. (The study is
available on the ADB website at www.adb.
org/tfp)
Hopefully, this information will help
governments get concerned about
growth and jobs and address issues that
impede trade fnance, including
unintended consequences associated
with regulatory requirements, and a lack
of harmonization on KYC (know your
client) and AML (anti-money laundering)
requirements.
Statistics
ADBs other non-transactional work was
to create frst-ever statistics in trade
fnance. The pilot ICC-ADB Trade Finance
Register gives statistical weight to the
argument that trade fnance carries a
relatively low probability of default and
loss. Three years and two more Register
reports later, the conclusion is the same:
defaults on trade fnance tend to be
about 0.02% to 0.04%, which is very low.
These statistics have been discussed with
the Basel Committee, and we believe
they are helping Basel consider the
possibility of treating trade fnance
diferently, perhaps even as a unique
asset class. The Register now needs to go
in a couple of additional directions: to
develop country-by-country stats and
special reports on how trade fnance
assets have performed during the crisis.
TFP and the fnancial gap
In addition to closing knowledge gaps
about trade fnance, ADBs Trade Finance
Program (TFP) is helping close fnancial
gaps. TFP does this by providing
guarantees and loans through partner
banks, over 200 of them, to support trade
in the most challenging Asian developing
countries.
In 2012, TFP supported $4 billion in
trade through over 2,000 transactions.
There was a more than 23% growth in
TFP volumes in Q1 2013. This level of
growth is unlikely to continue
throughout the year, but the overall trend
is clearly one of growth, as gaps in some
of TFPs markets seem to get larger and
ADBs role in flling those gaps has
become more prominent, as represented
by the exponential growth of the TFP
over the past few years.
About 75% of companies supported
by TFP in 2012 were small- and medium-
sized enterprises (SMEs). Given the
importance of this market segment in job
creation, and the fact that gaps
disproportionately involve SMEs, ADB is
pleased to see this kind of support
fowing through the program.
Importance of co-fnance
Another important element to TFP is its
ability to generate ($2.3 billion in 2012)
private sector capital into the most
challenging markets. Through the
programs partnerships with insurance
and commercial banks that assume risk in
TFP transactions, the Bank has been able
to leverage what fnancial capacity it has,
and more importantly to introduce the
private sector to frontier markets where
they may never have operated. Over
time, once a credit history is established
under TFPs guarantees, and because TFP
charges market rates for guarantees, the
private sector has a natural incentive to
fll market gaps without using
theprogram.
This is the perfect scenario the
private sector flling market gaps without
requiring ADB guarantees and funding
Beck: It would be better to consider an L/C to be a
unique instrument
Volume 19 No 3 20
and in an ideal world, TFP would render
itself redundant over time. In fact, thats
one of its objectives. But with trade
fnance gaps enlarging fueled by
political, economic and regulatory
uncertainties this doesnt seem likely
any time soon.
TFP does not assume risk in relatively
developed markets such as the PRC,
India, Thailand, Korea and Malaysia, but
focuses on countries where the gap is
proportionally greatest, such as
Bangladesh, Pakistan, Sri Lanka, Nepal,
Mongolia and Viet Nam, among others.
Expansion to Myanmar
Myanmars banking system and
commercial regulatory infrastructure is at
an early stage of development, which
makes it a real challenge for TFP to
expand there. The country is a perfect
market for TFP; its an extreme example of
why ADB and TFP exist: to be frst-movers
into new and uncertain markets: to fll
fnancing gaps for economic growth, to
provide technical assistance to upgrade
skills of Myanmars public and private
sectors and to create structures
(including the provision of guarantees)
through which partnerships are formed
with international investors and banks.
Because the Bank plans to have
expanded in Myanmar by end Q3 this
year, its been very busy there over the
past six months, having done due
diligence (DD) on nine banks in the
country. The banks have never been
through this kind of DD, so what they
learned in the process is very valuable
and hopefully will help them understand
what potential correspondent banks,
international investors and (over time)
rating agencies will require. ADBs open
and frank feedback to the banks about its
assessment will enhance this learning
process, which is important at this stage
of Myanmars development.
In addition, the Bank will be talking
with the Central Bank of Myanmar about
its DD methodology, which should
provide some important information and
learning opportunities for the Banks
personnel. And fnally the DD process
was critical for ADB to gain a better
understanding of the banking system
and individual banks in that market.
Equally important, the Bank is now able
to share what its learned from the
process with its partners around
theworld.
Most active markets
Outside of Myanmar, TFP continues to be
very active in Bangladesh and Pakistan,
monitoring risks and disseminating
knowledge about these markets to its
partner banks around the world.
Viet Nam is another very active market
for TFP, where there is more demand than
capacity, and the TFP has been
expanding in a number of central Asian
countries, including Kazakhstan, the
Kyrgyz Republic, Uzbekistan and
Tajikistan.
South-South trade
It has become trendy to talk about the
promise of South-South trade in creating
economic growth and jobs. Theres no
question the opportunities are
enormous, but to realize its full potential
there need to be more points of contact
and more relationships among banks to
underpin more trade. With the exception
of a few global banks with a presence in
most corners of the world, there are no
bank relationships between Latin
America and Asia outside of Japan, China,
India, Korea and Singapore. That means
there are no direct relationships between
banks anywhere in Latin America and
Indonesia, Viet Nam, Philippines, Sri
Lanka, Pakistan, Bangladesh, etc. And the
links between African and Asian banks
are even more sparse.
In an efort to change this situation,
TFP has been working with the African
Development Bank (AfDB) and the Inter-
American Development Bank (IDB). TFP
has been actively introducing IDBs trade
fnance program to Asian banks to
encourage them to sign up to IDBs trade
fnance program as confrming banks. In
turn, IDB has helped ADB do the same, to
encourage Latin American banks to join
TFP as confrming banks so that ADB can
provide guarantees to these banks
covering payment obligations from Asian
banks to support South-South trade. In
addition to covering transactions, by
having banks from both continents in our
respective trade fnance programs, ADB
will facilitate the establishment of direct
relationships between banks on both
continents.
The AfDB is in the process of
implementing a trade fnance program,
and it has decided to model the program
after the TFP. ADB has been working
closely to support the implementation of
this program and have provided its
operations manual, legal documentation
and training. Once the AfDB trade fnance
program is fully implemented, ADB plans
on swapping banks as it has started
doing with IDB.
Steven Beck is Head of Trade Finance at the Asian
Development Bank. His e-mail is sbeck@adb.org Other
ADB stafers engaged in TFP programs are Janet Hyde
(jhyde@adb.org), who handles Myanmar and other
Asian countries and Victoria Tyo (vtyo@adb.org), who
manages Viet Nam and several central Asian countries.
The TFP in Bhutan
Bhutan is a small landlocked country marked by both signifcant political transition and economic development. In 2008, Bhutan
ofcially transitioned from an absolute to a constitutional monarchy. Economically, Bhutan has close trade ties to India, Singapore,
Japan, Thailand and China. The economy of Bhutan is largely dependent on hydropower generation. In August 2011, Bhutan
National Bank (BNB), which has participated in ADBs TFP program since 2010, issued a 3,060,000 letter of credit for the import of
hydraulic equipment by the Mangdechhu Hydroelectric Project Authority. The Authority was set up by the Royal Government of
Bhutan to provide engineering services for construction of a 720 MW Mangdechhu Hydroelectric Project located in the Trongsa
Dzongkhag (District) of Central Bhutan. The transaction was supported with a guarantee issued by the TFP and confrmed by
Swedish Skandinaviska Enskilda Banken AB.
Mangdechhu Hydroelectric Project is part of the Framework Agreement signed between the Royal Government of Bhutan and
the Government of India for cooperation in the feld of hydropower sector. Under the agreement, the Government of India has
agreed to a minimum import of 5,000 MW of electricity from Bhutan by the year 2020. The equipment imported under the TFP
guaranteed L/C is critical to the whole project.
The project will have a huge impact on the overall economic development of the country and the well-being of its people, said
BNBs Chief Executive Ofcer Mr. Kipchu Tshering. The revenue earned from the export of electricity is a signifcant contributor to
the overall revenues of the Kingdom. There is great potential for increasing such export and consequently earn signifcant
additional revenues.
July September 2013 21
DOCDEX
Coming of age of the DOCDEX
decisions
by Chang-Soon Thomas Song
In 1997, the ICC Banking Commission
created a task force to look into the
possibility of an expert panel-based
dispute resolution system for letters of
credit transactions. Although litigation
and arbitration had been around for a
long time, and both had been used to
resolve L/C disputes, they were seen as
too lengthy and too costly to parties
seeking a rapid and cost-efective system
of dispute resolution.
After several months of analyzing the
situation and examining possible
alternatives, the DOCDEX system was
born. Though originally the system was
only used to settle disputes under letters
of credit, in 2002 the rules were amended
to include other ICC rules the Uniform
Rules for Collections (URC) and the
Uniform Rules for Demand Guarantees
(URDG). DOCDEX now stands for
Documentary Instruments Dispute
Resolution Expertise.
The better alternative
Last year, our bank pursued a letter of
credit litigation involving a very large
sum. The alleged discrepancy was a mis-
typing of one of the digits in the ten-digit
L/C number. The case was litigated in the
trial court, the intermediate court and
fnally the Supreme Court. The Supreme
Court held that the mis-typing of the L/C
number was a valid discrepancy. Had the
DOCDEX decision been used to resolve
the issue, the result could well have come
out diferently.
In another case, an issuing bank
refused payment on spurious grounds
and although our bank protested
strongly, the issuing bank maintained its
position. We suggested litigation to the
exporter, but he took the loss and closed
the fle. If the L/C had included a DOCDEX
clause, the bank would have been able to
resolve the case without going to court.
These two cases are illustrations of
how DOCDEX can be a better alternative
to court decisions in resolving disputes.
Incorporation
When the rules for DOCDEX were drafted,
there were discussions on whether to
suggest that they be incorporated in L/Cs
alongside the UCP. But due to the diverse
types of disputes which may arise under
L/Cs with some issues legal in nature that
could not be handled by the DOCDEX
expert panels, it was thought wise to
leave the incorporation of the rules up to
the parties.
A DOCDEX decision does not bind the
parties to follow the decisions issued by
the expert panels; it only serves as an
objective determination of the issues
involved in a documentary dispute.
Moreover, unlike arbitration, a DOCDEX
procedure can be instigated even if only
one of the parties agrees to use it.
Nonetheless, the decisions rendered can
be persuasive if the parties later decide to
go to court, and if both agree, the parties
have the option of making DOCDEX
binding. In fact, armed with a DOCDEX
decision, the parties may decide not to
go to court at all.
Even if a binding DOCDEX clause is
inserted in the contract, if the dispute
deals with legal issues outside the ICC
rules, the matter will have to be litigated
in court. Normally, however, this situation
will not arise, since the DOCDEX experts
will advise the parties that they are not
competent to render decisions on
legalissues.
The procedure
In the DOCDEX procedure, the parties, or
one of them, submit a request for a
DOCDEX decision to the ICC Centre for
Expertise. The Centre appoints three ICC
banking experts to review the issues
presented and render their decision,
usually within a period of 30-60 days, in
favour of one of the parties. Unlike the
ofcial opinions issued by the ICC
Banking Commission, which only give a
snapshot of the facts, the DOCDEX
decisions are much more comprehensive.
Included in the text are a list of the
documents submitted, the reasoning
behind the experts decision and an
interpretation how specifc articles of the
ICC rules apply in the case. This makes for
a more complete source of information
for practitioners.
DOCDEX and the UCP
With regard to L/Cs, DOCDEX can be
particularly useful to resolve disputes
concerning alleged discrepancies. Of
course, many of these disputes can be
settled by the parties without the
necessity of going through a dispute
settlement process. The UCP has a default
rule concerning the presentation period
of 21 days after shipment. When the
letter of credit is silent as to the
presentation period, it is deemed to be
21 days after shipment. Though the
period can be seven days or 14 days
rather than 21 depending on the
agreement between the exporter and the
importer, more often than not the 21-day
period prevails.
Consequently, even if a number of
discrepancies are noted in the refusal
advice sent by the issuing bank, all
discrepancies may be remedied and re-
presented. Without the need to argue
about whether the discrepancies cited
are valid or not, the benefciary can
simply correct the discrepancies and re-
present the shipping documents
accordingly. The 21-day presentation
period after shipment provides ample
time to cure the relevant shipping
documents.
Suppose, however, that the
presentation period is only seven days
after shipment. In such a case, the
benefciary might not have time to
Thomas Song: the decisions rendered can be
persuasive
Volume 19 No 3 22
Bogus documents and L/Cs put banks at risk continued from page 1
correct the discrepancies and to re-
present documents. Late presentation
could be the basis of the standard refusal
notice in case one of the parties refused
to allow re-presentation.
In this case, it would be necessary for
the benefciary to argue with the issuing
bank that the discrepancies on which the
refusal advice was grounded
are not valid. Normally this
argument will not have an
end because both sides will
argue that each side is correct.
However, if the DOCDEX
clause has been incorporated
into the letter of credit, then
one of the parties can send
the issue to DOCDEX, and the
experts will render an
expeditious decision.
The arbitration alternative
As noted, there are other paths to dispute
resolution; arbitration can also be
considered. Although arbitration
procedures are carried out under the
relevant substantive and procedural legal
rules, they are faster than court litigation
and the procedures are confdential.
Unlike DOCDEX, however, arbitration
requires the agreement of both parties
and the incorporation of the arbitration
clause in the contract. If this is done,
arbitration, unlike DOCDEX, is
automatically binding. However,
arbitration can be considerably more
expensive and time-consuming than
DOCDEX.
For letter of credit arbitration, the
parties can use the highly regarded ICC
Court of Arbitration. In
addition, there is a special
letter of credit arbitration
procedure administered by
the International Center for
Letter of Credit Arbitration.
Once a dispute is referred to
the Center, it will be dealt
with by expert arbitrators. The
Center, created after extensive
consultation with corporate,
legal and banking
representatives throughout
the world, was founded as a result of an
initiative from within the letter of credit
community. The Center was formally
established in September of 1996 and is
located in metropolitan Washington, D.C.
Conclusion
As noted, a DOCDEX decision can be
persuasive if the parties later decide to
go to court. One case in point was a letter
of credit dispute in Singapore concerning
the automatic adjustment clause relating
to the price of oil in which one of the
parties presented a DOCDEX decision in
its favour. The court considered the
decision, found it convincing and ruled
for the party that prevailed in the
DOCDEX case.
In the 15 years since its inception,
more than 100 disputes on this and other
matters have been handled by using
DOCDEX, and practitioners have come to
appreciate the convenience and cost-
efectiveness of the process. To keep
DOCDEX up to date, ICC has now
embarked on a project to revise the
DOCDEX rules. An updated version may
be approved sometime in 2013.
A fnal note for practitioners: ICC has
recently published DOCDEX Decisions
2009-2012, the third volume in its series
of DOCDEX cases. The publication, which
is well worth reading, contains a number
of important decisions rendered under
UCP 600.
Chang-Soon Thomas Song, Esq. is First Expert/
Attorney at Law, Trade and Services Division, Korea
Exchange Bank, Seoul, Korea. His e-mail is
thomas@keb.co.kr and Thomas.Song@azbar.org
The book ICC DOCDEX Decisions 2009-
2012 can be ordered at
www.iccbooks.com

More than 100
disputes on this
and other
matters have
been handled
various subcontractors who were to
complete diferent processes leading to
the fnished product. In the local market,
everyone referred to these L/Cs as back-
to-back with the implied assurance that
the risk on the sub-L/Cs was covered
under the Master L/C.
Using the sub-L/Cs as collateral, the
subcontractors drew funds from various
banks in advance of negotiation. What
the banks failed to appreciate was that
the L/Cs were not back-to-back, and
performance under the Master L/C was
signifcantly diferent from the
performance under the sub-L/Cs. The
Master L/C and, in many cases, the sub-
L/Cs, were not performed.
Furthermore, it turned out that the
benefciaries of the sub-L/Cs, the
subcontractors, were all part of the same
group as the benefciary under the
Master L/C. Around USD 300 million was
lost as a result of this fraud on a large
number of these transactions. The fraud
was also facilitated by political pressure
on the bank managers to ignore the
warning signs as the amounts at stake
accelerated to unacceptable levels.
Checks to verify the shipments would
have gone a long way to make a strong
case for stopping the fnancing before
the fraud got to a stage where the losses
became so severe that it became a major
issue for the many local banks embroiled
in this relationship and required the
intervention of the Central Bank.
Structured trade L/Cs
Another transaction doing the rounds in
recent years, and which reportedly has
had takers in trade fnance markets
around the world, is the structured trade
L/C. This is a misnomer. There is nothing
structured or trade-related about the
transactions described below.
The other names by which it is known,
fnancial engineering or synthetic L/C
perhaps describe it better, particularly if
its intent is similar to the now infamous
synthetic CDOs which, at least partly, set
of the fnancial crisis in 2007/2008. A
synthetic L/C is said to occur when
trading companies with strong balance
sheets lend money to smaller banks and
business groups. Instead of being
described as a loan, the documentation
dresses it up as a deferred payment
(typically 365 days) trade fnance
transaction relating to a shipment
ofgoods.
All parties, including at times the
confrming banks, know that there are no
underlying goods. In fact, the L/C often
calls for presentation of copy documents.
Setting up the loan as a trade fnance
transaction circumvents oversight by
regulators into the loan. Fees earned by
the confrming banks are high,
encouraging them to ignore the obvious
warning signs. Confrming banks are led
to believe their sole risk is the credit risk
on the opening bank.
The often overlooked fundamental
faw in these schemes is that they are
building substantial debt obligations on
transactions that have no intrinsic value
and that are based on documents that
misrepresent the true nature of the
23

transaction. Do you hear familiar echoes

of the recent past?
Purists may rightly say that this was
not the purpose for which the UCP was
designed. There have been cases when
on the due date the confrming bank has
not been able to collect on its debt. When
that happens, it will fnd itself
on its own, with little support
from the trader who invited it
into the transaction, who will
say, correctly, that the banks
knew from the outset exactly
the kind of transaction they
hadfnanced.
Risks
Often, banks enter into this
type of transaction because it
is seen as an easy way to meet
hard-to-achieve targets in a tough
economic climate particularly when
other banks set the trend. Management
in banks need to focus on the true nature
of these transactions and provide clear
direction to their teams as to the type of
transactions acceptable to the bank.
Many banks have taken the position that
they will not participate in
theseschemes.
Financing spurious transactions may
comply with the terms of the UCP, but for
many good reasons it may not be in the
banks interest to become involved. These
include vulnerability to fraud,
involvement in money laundering
schemes, illegal capital fight and
reputational risk. What starts of being
perceived as a short-term manageable
risk can soon escalate in value and risk as
the message that this is acceptable
business quickly flters
through to lower levels in the
bank. The bank itself
eventually becomes the
victim; hence, the need for it
to have measures in place to
identify and avoid these
schemes.
Trade fnance in its
traditional form is a reliable,
solid business, based on
goods traded or services
provided. The fnancing of
these spurious shipments in the
knowledge that the goods do not exist
distorts this model and weakens the case,
strongly made to regulators and
governments, that trade fnance is a non-
speculative and inherently safe
fnancialactivity.
P. Mukundan is Director of ICC Commercial Crime
Services, of which the International Maritime Bureau is a
specialized division.
His e-mail is pmukundan@icc-ccs.org
ICC tools for trade fnance
www.iccbooks.com

International Standard Banking Practice
To refect current best practice and
recent developments in the world of
trade fnance, the ICC Banking
Commission has now updated the
highly successful International
Standard Banking Practice (ISBP). If
you use documentary credits in your
daily job, the ISBP is the defnitive text
interpreting the UCP.
Uniform Rules on Bank Payment
Obligations (BPO)
Bank Payment Obligations enable
fexible fnancing propositions across
the supply chain, from pre-shipment
to post-shipment. The worlds frst
rules on BPOs will help harmonize the
use of supply chain fnance practices
and foster better understanding of
these innovative solutions.
The ICC Guide to the Uniform Rules for Bank
Payment Obligations
by David J. Hennah
This manual guides practitioners in
their interpretation of the Uniform
Rules for Bank Payment Obligations
and provides substance to the
practical application of the BPO in the
context of real life scenarios. A vital
reference for anyone involved in
fnancial supply chain transactions
and electronic trade.
ICC Uniform Rules for Forfaiting URF 800
Including Model Agreements
The URF for the frst time provide a
standard set of forfaiting rules that
refect a broad consensus among
bankers, users and all members of
the forfaiting community worldwide.
Created by experts for experts, URF is
a must-have for anyone involved in
forfaiting transactions.
The Law of Letters of Credit in China
This book is of immense help for
anyone doing export/import
transactions with China. Detailed
comments, in-depth explanations
and critical analyses enable trade
fnance practitioners to better
understand the L/C system and
related judicial interpretations
inChina.






it may not be in
the banks
interest to
become
involved
New L/C developments in the Middle East
Saudi Arabias switch of weekend days to Friday and Saturday from Thursday and
Friday will improve the Kingdoms letter of credit and other trade fnance operations
according fnancial analysts. Along with the business community in general, they
welcome a weekend that aligns Saudi Arabia better with most of the global business
and fnancial world.
The new weekend will increase the Kingdoms working overlap with international
markets, which should boost efciency and productivity in the regions biggest
economy. Many companies in the Kingdom have already decided to shift their
weekends to Friday and Saturday after the ofcial decree at the end of June.
According to a chief investment strategist at Masic in Saudi Arabia, fnancial
institutions better aligned with the rest of the world will be able to react to events in
a timelier manner. He also points out that banks and their clients will be able to
transact globally more quickly.
Observers reckon the extra day in the commonly used Monday to Friday week will
make several diferences. They believe it should have favourable impacts in terms of
pricing, transacting on payments, opening L/Cs and other trade fnance operations
that were only available for three days per week under the old system.
Meanwhile, in Iraq the government has agreed to provide both Egypt and Sudan
with crude oil to be purchased on L/C terms. The news follows reports that the
National Bank of Egypt has agreed to provide L/Cs to Egyptian General Petroleum
Corporation US$1 billion for purchases of Libyan crude oil. Iraq has so far only agreed
in principle to provide both Egypt and Sudan with crude oil on L/C terms. Oil
shipments will begin once Egypt and Sudan obtain L/Cs from international banks and
Iraqs cabinet issues its fnal approval of the deal. According to an Iraqi petroleum
ministry ofcial, the agreement has recently been signed with Egyptian counterparts.
Volume 19 No 3 24
In future issues of DCInsight
The latest on Basel III and L/Cs
The B/L clause if required by carrier
More information on the Bank Payment Obligation
(BPO)
Sizing up the problems with online L/Cs
More Banking Commission opinions from the Lisbon
meeting
And more
Director of the Publication
Stefano Bertasi
Director of Policy and Business Practices, ICC
Director of Strategic Development
Laetitia Montalivet
Editor
Ron Katz
e-mail: kazzole.ronald@gmail.com
www.editinginenglish.com
Technical Editor
Donald Smith
Copy Editor
Therese Hogan
Chairman of the Editorial Board
Kah Chye Tan
Global Head of Corporate Cash and Trade
Standard Chartered Bank, Singapore
Members of the Editorial Board
Georges Afaki
Member of he Executive Committee and Global Head of
Structured Finance, BNP Paribas, France
Gary Collyer
Technical Adviser, ICC Banking Commission
King-tak Fung
Banking Partner, DLA Piper, Hong Kong
R.S. Jones
Chairman of the ICC UK Banking Committee
Professor Avv. Salvatore Maccarone
Professor of Law, University of Rome, Italy
Yanling Zhang
Executive Vice-President, Bank of China, Beijing, China
International Correspondents
Mark Ford, Roger Fayers, N.D. George
Plus national correspondents in more than 30 countries
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Published quarterly in English by ICC Services
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Articles represent the opinions of the authors and do not
necessarily refect the views of ICC or the ICC Commission on
Banking Technique and Practice. No legal imputation should
be attached to any of the articles in this Newsletter and no
legal responsibility is accepted for any errors, omissions or
misleading statements caused by negligence or otherwise.
No articles can be reproduced in whole or in part without
theexpress written permission of the publisher.
2009, 2010, 2011 International Chamber of Commerce
Dpt lgal juillet 2013 ISSN 1024008X
In brief
New ISO 2022 SWIFT messages for L/Cs,
guarantees and standbys
New standardized international messages have been approved under the ISO
standards for fnancial services messaging, giving SWIFT the green light to use 20 new
message defnitions to support demand guarantees and standby letters of credit (see
the Insight interview in this issue). The new defnitions respond to industry calls to
change SWIFT Category 7 messages for these instruments, which have remained
largely unchanged for around thirty years. The new set of ISO 20022 messages aim to
ensure coverage of the full end-to-end fows (applicant-bank-bank-benefciary) of
demand guarantees and standby L/Cs. According to an ISO statement, the messages
are more structured and granular, aim to improve straight through processing and
allow that process to be monitored and managed in a more efective and efcient
manner. Messages include support for business functions such as application, issuance,
confrmation, advising, amendment, counter-undertaking, demand processing and
termination. The demand guarantees and standby L/Cs message defnitions
standardize the message fows and message structures used for information
communication among the parties dealing with these instruments.
China and hidden L/Cs
Hidden letters of credit may be contributing to what some analysts say is a looming
debt crisis for China as borrowings soar at an alarming rate. Ratings agency Fitch,
appears to be leading the way in fagging Chinas surging indebtedness, cutting the
nations long-term local-currency rating. Conservative estimates put Chinas debt to
GDP ratio at 160 per cent, but according to Fitch, it is more like 200 per cent. The
agency says that L/Cs, along with fnancing by non-bank institutions and ofshore loans
by foreign banks, push the debt to GDP ratio up a substantial 40 per cent. It believes
the ratio provides a crucial warning that has already signalled other fnancial crises in
Asia. It also indicates that the scale of the crisis in China could be much greater than in
previous economic meltdowns.
Strong growth in Moscow L/C business
Credit Bank of Moscow (CBM) has reported strong frst quarter growth in the amount of
L/Cs and bank guarantee business it has written. The bank also reported strong overall
growth, with net income amounting to 1.7 billion Russian rubles (RUB1.7 billion
US$56.1 million) in the frst quarter of 2013, up by 43.7 per cent compared with the
same period last year. The banks fee and commission income soared by 57.1 per cent
in the frst three months of this year compared with the frst quarter of 2012. Of this
increase, 19.8 per cent was attributable to L/Cs and bank guarantees, the value of
which increased by 35.4 per cent or RUB1.2 billion. The volume of trade and structured
fnance transactions seen by CBM in the reporting period was US$170 million, which is
32.2 per cent more than in the frst quarter of 2012.
Iraqs central bank opens new L/Cs
The Central Bank of Iraq (CBI) is opening letters of credit with Iraqi banks as part of its
eforts to stem the decline of the Iraqi currency against the US dollar. Measures to
encourage the proper use of L/Cs are also a priority for the CBI in its eforts to crack
down on currency speculation that is damaging the Iraqi economy. The CBI has
revealed that during May it opened L/Cs with Rafdain Bank and Rasheed Bank, which
are respectively Iraqs largest and second-largest banks. The terms of the L/Cs have not
been disclosed, but they have replaced what one central bank ofcial described as
trade credits previously provided by the CBI, which enabled Iraqs banks to obtain
foreign currency. The CBI has been concerned that support it has provided for the
purpose of obtaining foreign currency to facilitate trade between Iraq and international
counterparties has instead been used for speculative purposes. Such speculation has
driven the value of the Iraqi dinar down, bankers say. In this respect, analysts say the
L/C terms may require banks to use CBI support only for the purpose of obtaining
currency for genuine international transactions.