What Is a Clean Letter of Credit?

A letter of credit refers to a written document issued by a bank to an exporter (seller) at the request of an importer (buyer) to guarantee payment responsibility. In the L / C, the bank authorizes the exporter to issue the bank or its designated bank as the payer, in accordance with the conditions stipulated in the L / C, to issue a bill of exchange not exceeding the prescribed amount, and attach the shipping documents in accordance with the regulations. Collect payment at the location.

letter of credit

The general procedure for the payment of a letter of credit is: (1) The parties to the import and export shall clearly stipulate that the letter of credit shall be used for payment in the sales contract. (2) The importer applies to the bank where it is located, completes an application for issuance, and pays a certain deposit for issuance or provides other guarantees, and asks the bank (issue bank) to issue a letter of credit to the exporter. (3) The issuing bank shall open the L / C with the exporter as the beneficiary according to the content of the application, and notify the exporter of the L / C through its correspondent bank or correspondent bank (collectively the notifying bank) at the exporter's location. (4) After the exporter ships the goods and obtains the shipping documents required by the L / C, the exporter negotiates the payment with the local bank (either the advising bank or another bank) in accordance with the L / C. (5) After the negotiation bank negotiates the payment, the negotiation amount is indicated on the back of the L / C. ^[1]

Letter of Credit (L / C) refers to a bank (Issuing Bank) in accordance with the requirements and instructions of the (Applicant) or on its own initiative, and in accordance with the terms of the letter of credit, to a third party with the required documents (

(1) Explanation of the letter of credit itself. Such as its type, nature, period of validity and place of expiration.

(2) Requirements for goods. Describe according to contract.

(3) Requirements for transportation.

(4) requirements for documents, that is, cargo documents,

The letter of credit method has three characteristics:

One is that the letter of credit is a self-sufficient instrument. The letter of credit is not attached to the sales contract, and the bank emphasizes in the written form that the letter of credit is separated from the basic trade when reviewing the document;

The second is that the L / C method is pure documentary transaction. L / C is payment by voucher, not the goods. As long as the documents match, the issuing bank should pay unconditionally;

Third, the issuing bank has primary liabilities for payment. Letter of credit is a kind of bank credit. It is a guarantee document of the bank. The issuing bank has the primary responsibility for payment.

(1) The issuing applicant shall complete the application for issuance according to the contract and pay a deposit or provide other guarantees. The issuing bank shall issue the issuance.

(2) The issuing bank issues a letter of credit to the beneficiary based on the content of the application and sends it to the notifying bank where the exporter is located.

(3) Notify bank to check

Letter of credit is not issued in accordance with the contract

Its terms should be strictly consistent with the sales contract, but in fact, for various reasons, the importer does not issue a certificate in accordance with the contract, which makes the implementation of the contract difficult, or causes the exporter to suffer additional losses. The most common are: the importer does not issue the certificate on time or does not issue the certificate (such as in the case of market changes and strict foreign exchange and import controls); the importer adds some additional terms in the letter of credit (such as unilateral increase Insurance type, amount, change of destination port, change of packaging, etc.) in order to achieve the purpose of attempting to change the contract; the importer makes many restrictions in the letter of credit, etc.

Obstacles in Letter of Credit

Importers often use the "strict and consistent" principle of L / C to deliberately add some difficult conditions or set traps in the L / C. If the regulations are uncertain, there are typos and conflicting terms.

There are typos on the L / C, such as misspelling of beneficiary's name, address, shipping vessel, address, expiration date, etc. Don't think it is a small flaw. They will directly affect the required documents and may be the reason for the issuing bank to refuse to pay. . In addition, the L / C stipulates that the prohibition of partial shipments and the limitation of the delivery time of each batch, or the presentation of intermodal bills of lading but the prohibition of transhipment, or the types of insurance required overlapping with each other are undoubtedly contradictory.

Letter of Credit forgery

Forgery of L / C, or stealing blank printed L / Cs from other banks, or maliciously collaborating with staff of banks that have closed or are nearing bankruptcy to open L / C, etc., and send them to exporters. If they are not aware, the exporters will result in two payments. Empty loss.

L / C not easily available

A document signed by a specific person, or indicating the shipping position of the cargo or the container bill of lading contained in the cabin, or expressly requiring FOB to apply for an insurance company's receipt under CFR conditions to negotiate, which is simply impossible for the seller as a beneficiary Performance or beyond the seller's control.

L / C requirements vary

In practice, the seller must not be negligent in that although the terms of the letter of credit stipulate conditions favorable to one's own side, the relevant national or local laws and the regulations of the issuing department do not allow the provisions of the letter of credit to be realized. First, understand first, and strive to delete the relevant clauses when appropriate, and should not be bound by the laws of other countries.

Letter of Credit Fraud

The importer deliberately alters the expired L / C, changes the amount of the original certificate, the shipping period and the name of the beneficiary, and directly mails or delivers to the beneficiary to defraud the export goods or induce the exporter to open a letter of credit to it. Scam bank financing. For example: A foreign trade company in Jiangsu has received a letter of credit opened by a Hong Kong merchant face-to-face with a value of USD 3.18 million. After review by the local Bank of China, it was found that the amount of the certificate, the shipping period and the name of the beneficiary were markedly altered. Therefore, the beneficiary was reminded to pay attention to it and immediately check with the issuing bank, and finally found out that the card was altered by the merchant and handed it over to the foreign trade company in an attempt to require our bank to issue a USD 6.3 million letter of credit to it so that Slamming abroad. In fact, this is an old letter of credit that has long since expired. Fortunately, our bank was vigilant enough to stop this huge letter of credit fraud.

Letter of Credit

The so-called "counterfeit letter of credit fraud" refers to the intention of the importer to falsify the seller's bulk export goods in order to gain the trust of the exporter on the basis of providing a false letter of credit.

For example: A bank of China has received an electronic letter of credit issued by the Indonesian European and American Bank in Jakarta, Indonesia requesting confirmation from Union Bank of New York. The amount is USD 6 million. The beneficiary is a Guangdong foreign trade company. The export goods are 2 million pieces. Snakeskin, but checked the bank's yearbook and did not have the information of the issuing bank. Later, it received a confirmation letter from Union Bank of Zurich, but only one of the two signatures was similar and the other could not be verified.

Letter of credit separately instructed

If the letter of credit requires further shipment, the shipment date will be notified separately, the import license must be approved, and the cargo samples must be inspected and approved, etc., all may be left unnoticed. As a result, after the seller prepares the goods, the price of the goods will rise. Or fall and suffer losses.

Letter of credit non-license transaction

The payment must be made after the goods have been delivered to the destination, after the goods have passed the inspection or approved by the foreign exchange control authority; or the importer's acceptance bill is the payment condition. If the buyer does not accept the payment, the issuing bank will not be responsible. It is no longer a letter of credit and there is no guarantee for exporters.