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2nd Lecture. Letter of Credit (L/C)

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1 2nd Lecture. Letter of Credit (L/C)
1. L/C Operation (1)General Theory of L/C (2)Basic Factors of L/C (3)Parties Concerned with L/C Transaction (4)Variety of L/C 2. Reading L/C (1)Variety of L/C Related SWIFT Messages (2)Composition of MT 700(L/C Establishment)

2 2nd Lecture. Letter of Credit
1. L/C Operation (1) General Theory of L/C Meaning of L/C Settlement method used in order to devise fluent international business transaction by hardening credibility of both importer and exporter through mediation of banks with publicity -‘Letter of commitment of conditional payment’: According to importer’s instruction, issuing bank opens L/C. Exporter submits documents stated on L/C and the documents are exchanged with export money, and at last, importer can claim imported goods. Bank Submit Document Open L/C Payment settlement Exporter Importer Bigger, Safer, and more Fluent Transaction Utility of L/C Exporter Can manufacture and gather goods regardless of credibility of importer Can receive all the money at his bank as soon as he submits transport documents after shipment Can benefit from trading finance before shipment, based on L/C Exporter can safely start manufacturing by receiving irrevocable L/C Importer Can import regardless of his own credibility Can pay after confirming that the goods are actually shipped through documents Has same effect as import fund financing and can commit credit transaction Can claim goods on the date he wishes to Issuing Bank - Can pass the risk and costs to importer - Obtain security rights on goods on-board Negotiating Bank Payment will definitely be settled by issuing bank once the document it buys from exporter matches conditions of L/C -Negotiating bank can ask money directly from exporter once the documents go bankrupt

3 Principle of Independence
L/C 특성 Principle of Independence Once L/C is opened, L/C is totally independent from sales contract and other contracts it is based upon . Independence from Sales Contract If L/C is opened, sales contract becomes totally unrelated with L/C and does not have any binding power - If there is inconsistency between sales contract and L/C, process through L/C - Even when sales contract is canceled, L/C transaction is still valid Independence from L/C Issuing Contract L/C is independent from issuing contract between importer and issuing bank - Applicant cannot plea against issuing contract for the payment by L/C - Neither can Beneficiary Principle of Abstraction Everyone concerned with L/C proceeds transaction with abstract documents, not the real goods Transaction by Documents All concerned people transact according to documents, not the real goods, services or other financial liabilities related to the documents . Basic Concept of Trading Activation Concept to protect negotiating bank that purchases transport documents related to L/C because banks do not have information and experience in real good transaction Limits of L/C Disadvantage for Importer Exporter이 L/C 거래의 추상성을 악용하여 대금 지급 요구 시 Importer은 L/C 대금을 지급을 해야 하므로 Importer이 요구하는 상품을 반드시 수입할 수 있다는 보장이 되지 않음. Disadvantage for Exporter Importer이 L/C 거래의 추상성을 악용하여 서류상의 사소한 오류를 트집잡아 지급을 거절하거나 가격할인을 요구하는 한계점 존재 ※Fraud Rule Even when the submitted documents match the conditions of L/C, if they were written out upon ‘forgery or fraud’, issuing bank exceptionally stop redemption of L/C according to ‘judgment of court’ ※ Injunction: Ruled out when importer directly gives proof to court that proves that the contract document is forgery or fraud. May it be in discord with independent abstraction of L/C and immunity clause of bank however, it is approved in international precedents This whole rule conflicts with the biggest characteristic of L/C, the independent abstraction, and can shrivel L/C transaction so they are approved very restrictively

4 (3)Parties Concerned to L/C
(2)Basic Factors of L/C Basic Factors Bank’s undertaking to reimburse Documents required Indication whether Revocable or Irrevocable Expiration Date How and Where to use L/C Time of Document Presentation Composition of L/C Matters Related to L/C itself Related to Product Details Related to Bill of Exchange Related to Documents Related to Shipment Other Specially Mentioned Matters (3)Parties Concerned to L/C Parties Concerned to L/C Generally importer. Often called Consignee because he consigns goods Applicant (Buyer, Importer, Consignee) Confirming Bank Bank added by request from issuing bank that double-confirms the documents Exporter who benefits from L/C transaction . Called ‘Consigner’ for consigning goods Called ‘Drawer’ for being publisher of bill of exchange Negotiating Bank (Negotiating Bank) Beneficiary (Seller, Exporter, Consignor, Drawer) Purchases transport document and pays money for it Paying Bank L/C Issuing Bank(Issuing Bank) In charge of payment in deferred L/C transaction Bank that issues L/C Accepting Bank Nominated Bank Accepts bill of exchange when the L/C is acceptance L/C and pays money on maturity date Where L/C can be used, designated by issuing bank Advising Bank Reimbursing Bank Takes care of inter-bank settlement if reimbursement L/C is used Gives notification of L/C Confirmation: A definite undertaking of the confirming Bank, in addition to that of the issuing Bank, to honour or negotiate a complying presentation Duty of Concerned Parties in L/C Transaction Importer and Exporter Importer Exporter -Duty of L/C Publication -Duty of Payment -Duty of Delivering Doods, -Duty to Follow L/C Conditions

5 (4) Variety of L/C Issuing Bank and Applicant Issuing Bank
-Duty to Follow Instruction -Duty to Open L/C -Duty to examine Documents Applicant -Duty to Reimburse -Duty to Pay Commission to Reimburseing Bank and Take Risks -Duty to Follow Foreign Custom and Legislation Issuing Bank and Beneficiary Issuing Bank Beneficiary -Duty to present Documents and Bills of Exchange Matching to Conditions of L/C -Duty to Make Payment Positions of Each Party Involved in L/C Transaction ○Position of Advising Bank Entrusted by Issuing Bank : Duty of delivering L/C safely and correctly Relationship with Issuing Bank  Advising Bank does not have to pay, undertake nor purchase unless it is confirming bank. Relationship with Beneficiary  No duties or legal binding Advising Bank Relationship with Applicant  L/C - Has to be very careful about sincerity of L/C Relationship with Negotiating Bank  Do not have any duties unless it confirms L/C Nominated Bank approved by issuing bank has ‘rights’ to undertake, purchase, or pay for the L/C but it is ‘rights’ not ‘duty’ If a bank undertook, purchased, or paid for the documents matching L/C conditions, the bank can ask for C.O.D. to issuing bank ○Positions of Paying, Accepting, and Negotiating Banks Relationship with Issuing Bank Paying, Accepting, Negotiating Banks Relationship with Beneficiary Paying, Accepting, Negotiating banks can ask money directly to beneficiary (4) Variety of L/C L/C Classified by Presented Documents Documentary L/C Non-Documentary L/C -Clean L/C: used in transaction of labor or service, not merchandises, Does not include transport document -Standby L/C: used in guaranty of banks such as contract payment guarantee. Does not include transport document Classified by Publication Method Telex L/C SWIFT L/C Mail L/C ※SWIFT: Society for Worldwide Interbank Financial Telecommunication Classified by Settlement Period Sight L/C Usance L/C - Shipper’s Usance L/C - Banker’s Usance L/C(Domestic Usance L/C) Mixed Payment L/C Installment Payment L/C Red-clause L/C

6 2. Reading L/C (1) Variety of L/C Related SWIFT Messages
SWIFT : Society for Worldwide Interbank Financial Telecommunication which is a sytstem that has been organized in order to rapidly, and precisely settle with international payment through exchange bank. It is a NPO with members of major banks of Europe and North America and has been established in May The headquarter is located in Brussels. 2. Reading L/C (1) Variety of L/C Related SWIFT Messages Message Type Message Type Name Usage (Purpose) 700 / 701 Issue of Documentary Credit Used in L/C publication 705 Pre-Advice of a Documentary Credit Notifying Beneficiary about preliminary information before opening L/C 707 Amendment to a Documentary Credit Amendment of L/C conditions 710 / 711 Advice of a Third Bank’s Documentary Credit Used when Advising Bank notifies the third Advising Bank about L/C 720 / 721 Transfer of a Documentary Credit Used in case of L/C negotiation 730 Acknowledgement Advising Bank notifies Issuing bank about receiving L/C 732 Advice of Discharge Issuing bank or Negotiating Bank notifies each other about receiving defected documents 734 Advice of Refusal Used when issuing bank notifies Negotiating Bank about defects of documents 740 Authorisation to Reimburse Used when issuing bank asks reimbursement bank for reimbursing authorization 742 Reimbursement Claim Used When negotiating bank asks reimbursement bank for money 747 Amendment to an Authorisation to Reimburse Used when issuing bank changes reimbursement bank 750 Advice of Discrepancy Negotiating bank notifies discrepancy to issuing bank 752 Authorisation to Pay, Accept or Negotiate Accepting negotiation of MT 750 754 Advice of Payment /Acceptance/negotiation Negotiating bank notifies purchase of healthy documents to issuing bank 756 Advice of Reimbursement or Payment Used when issuing bank notifies negotiating bank about settlement 797 Free Format Message Free format message, used in other not-standardized matters. (2)MT 700(L/C개설)의 구성 Status Tag Field Name Content / Options M 27 Sequence of Total 1n / 1n 40A Form of Documentary Credit 24x 20 Documentary Credit Number 16x O 23 Reference to Pre-Advice 31C Date of Issue 6n 40E Applicable Rules 30x[/35x] 31D Date and Place of Expiry 6n29x 51a Applicant Bank A or D

7 Example1. Status Tag Field Name Content / Options
50 Applicant 4*35x 59 Beneficiary [/34x], 4*35x 32B Currency Code, Amount 3a15number O 39A Percentage Credit Amount Tolerance 2n / 2n 41a Available With .... By .... A or D 42C Drafts at ..... 3*35x 42a Drawee 42M Mixed Payment Details 42P Deferred Payment Details Example1. ::700 Issue of Documentary Credit :27 Sequence of Total:1/2 :40A Form of Documentary Credit: IRREVOCABLE :20 Documentary Credit Number: OD :31C Date of Issue:070703 :40E Applicable Rules: UCP LATEST VERSION :31D Date and Place of Expiry: AT HOCHIMINH CITY :50 Applicant: ABC Co. :59 Beneficiary: XYZ Co. :32B Currency Code and Amount:USD100000,00 :41D Available With ... By ...:ADVISING BANK BY MIXED PYMT :42M Mixed Payment Details: PLS SEE 46B :44C Latest Date of Shipment:080305 :45A Description of Goods and/or Services: COMMODITY: +TREATED WATER PUMP STATION PIPE WORKS : USD 50,000.00 +ERECTION : USD 50,000.00 TOTAL AMOUNT: USD100, CIF HOCHIMINH CITY DESCRIPTION GOODS, SPECIFICATION,PRICES AND OTHER DETAILS AS PER CONTRACT NO.A/97/ICB/3 PACKAGE IV DATED 15/04/99 :47A Additional Conditions: +REIMBURSEMENT UNDER THIS L/C (IF ANY) IS SUBJECT TO THE ADB'S ''COMMITMENT LETTER (C/L) TO REIMBURSE''ISSUED BY THE ASIAN DEVELOPMENT BANK. +ONE COPY SET OF DOCUMENTS REQUIRED FOR OPENING BANK'S FILE +ACCEPTANCE OF ANY DISCREPANCY(IES) IN ANY PRESENTATION OF DOCUMENTS BY US DOES NOT IMPLY OR CONSTITUTE ANY AMENDMENT(S) TO THIS L/C FOR THE PURPOSE OF ANY FUTURE DRAWING(S). ----- The Rest is Omitted

8 Example2. Example3. Example4. ::707 DOCUMENTARY CREDIT AMENDMENT
::700 Issue of Documentary Credit :27 Sequence of Total:1/1 :40A Form of Documentary Credit: IRREVOCABLE :20 Documentary Credit Number:ILCC500381 :31C Date of Issue:070702 :40E Applicable Rules: UCP LATEST VERSION :31D Date and Place of Expiry:070725KOREA :50 Applicant: ABC CO. CALGARY, ALBERTA :59 Beneficiary: XYZ CO. SEOUL, KOREA :32B Currency Code and Amount:USD :41D Available With ... By ...:CIBC BY ACCEPTANCE :42C Drafts at ...:45 DAYS FROM BILL OF LADING :42D Drawee: CIBC TRADE FINANCE CENTRE CALGARY, ALBERTA :43P Partial Shipments: ALLOWED :43T Transshipment: ALLOWED :44A Place of Taking in Charge /Dispatch from../ Place of Receipt :SEOUL, KOREA :44B Place of Final Destination/ For Transportation to/ Place of Delivery: EDMONTON, ALBERTA :44C Latest Date of Shipment:070715 :45A Description of Goods and/or Services: CARBON STEEL FLANGES :46A Documents Required: INSURANCE POLICY/CERTIFICATE ALL ORIGINALS ISSUED MUST BE PRESENTED – COVERING ALL RISKS - PAYABLE IN NEGOTIABLE FORM FOR 110 PERCENT OF INVOICE VALUE COMMERCIAL INVOICE IN TRIPLICATE CANADA CUSTOMS INVOICE IN TRIPLICATE BENEFICIARY SIGNED STATEMENT THAT ONE SET OF NEGOTIABLE DOCUMENTS HAVE BEEN AIRMAILED TO THE APPLICANT WITHIN 10 DAYS AFTER SHIPMENT. FULL SET OF CLEAN MULTIMODAL (COMBINED) TRANSPORT BILL(S) OF LADING TO SHIPPERS ORDER BLANK ENDORSED MARKED NOTIFY WFFFITTINGS AND FREIGHT PRE-PAID The Rest is Omitted Example3. ::707 DOCUMENTARY CREDIT AMENDMENT :20 Sender's Reference:M06H7112NU00064 :21 Receiver's Reference: NONREF :31C Date of Issue:011212 :30 Date of Amendment:011231 :26E Number of Amendment:01 :59 Beneficiary (Before this Amendment): SHANGHAI JIN HANG INTERNATIONAL TRADING CO., :32B Increase of Documentary Credit Amount:USD5738,10 :34B New Credit Amount After Amendment:USD59648,20 :44C Latest Date of Shipment:020122 :72 Sender to Receiver Information: ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED. ----- The Rest is Omitted Example4. ::740 Authorization to Reimburse :20 Documentary Credit Number:M EU00057 :31D Date and Place of Expiry:990721IN U.S.A. :32B Credit Amount:USD :41A Available With ... By ...:KOEXUS6S BY NEGOTIATION :42C Drafts at ...:2 YEARS FROM B/L DATE :42A Drawee:SEAFUS66 :71A Reimbursing Bank's Charges:CLM :72 Sender to Receiver Information: + THIS IS SUBJECT TO ICC URR525. KOREA EXCHANGE BANK, SEATTLE BANKER'S USANCE

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