In the last newsletter, I referred to the ICC Survey "Rethinking Trade Finance 2009: An ICC Global Survey" that was made available at the end of March. This Survey, responded to by 122 banks in 59 countries, highlighted a number of issues that had been faced by banks in the last quarter of 2008, when compared to the same period in 2007. One of the areas of focus was the operational impact with regard to discrepancies.
The Survey gave the following results in this respect:
30% of respondents experienced an increase in the number of refusals by issuing banks when comparing the last quarter of 2008 with the same period in 2007;
20% of respondents, when acting in the capacity of an issuing bank, indicated that there had been increased pressure from applicants to refuse documents. The main reason cited was "falling commodity prices".
40% of respondents, when acting in the capacity of a nominated bank, indicated they had experienced an increase in the number of spurious/questionable refusals.
These trends seem to have continued well into 2009. Whilst it is recognised that refusals, due to discrepancies, have become a daily activity for banks on a global basis, a number of the reasons for refusal must be called into question as to their validity. It is no coincidence that for all the DOCDEX cases that were decided in 2008, where the issuing bank had refused documents, the DOCDEX panel of experts found in favour of the nominated bank or beneficiary.
From an 'average' reported level of around 70% of documents being discrepant on first presentation, we are now finding that rate to be quoted as 75-80%. One bank, unofficially, reported to me a rate of 98% for their import letter of credit transactions. Caution seems to be the operative word in the documentary credit departments around the world if in doubt, refuse.
It should not be forgotten that a refusal of documents should be based upon one or more documents not complying following:
1. examination of the document(s) against the terms of the LC;
2. examination of the document(s) against the applicable provisions of UCP; and
3. examination of the data in a document with similar data appearing in any other stipulated document(s).
With this in mind, I wish to share with you some of the discrepancies that have been referred to me during the course of the last 6 months or so where there was nothing to substantiate the refusal.
Discrepancy:
Grade of steel mentioned in Mills Test Certificate is not as per clause No. 4 of field 46A of the L/C.
Comment
Field 46A clause 4 only stated "Mills Test Certificate". There was no requirement in clause 4 for the grade of the steel to be mentioned. Clearly the issuing bank had intended to insert something but they did not. (value of the drawing USD8.8m)
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Discrepancy:
Short quantity supplied in the size 2.00x1230mm which is less than 10 percent which is not as per clause 45A of the LC terms.
Comment
Field 45A gave a quantity of goods (5 different sizes) all subject to 10% +/-. Quantity shipped of size 2.00x1230mm was more than -10% but LC allowed partial shipments. (value of drawing USD6.4m)
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Discrepancy:
Certificate of Origin does not show name of the consignee.
Comment
The condition in the LC was "Certificate of Origin". There was no requirement for the consignee to be shown. (value of drawing USD3.6m)
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Discrepancy:
B/L shows goods shipped on deck.
Comment
BL was a charter party BL which had pre-printed text "(of which
.. on deck at shippers risk, carrier not responsible
.)". This is standard wording in a charter party BL. The gap was not completed with any quantity and therefore no goods were shipped on deck. (value of drawing USD1.7m)
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Discrepancy:
Clean on board date not indicated on BL; wrong beneficiary address on documents and documents not presented by express mail.
Comment
A standby LC required presentation of draft, copy invoice, copy clean on board BL and various certificates. Documents were to be sent by express mail and beneficiary address in SBLC was stated to be "Zu, Switzerland".
The copy BL showed an on board date but was not marked clean". There were no notations or clauses regarding a defective condition of the goods or their packaging. In any event, this was a BL that was not issued under the requirements of article 20. The beneficiary address was Zug (in Switzerland) and, even though the credit was clearly wrong in providing the beneficiary address, sub-article 14 (j) would allow a different address. The documents were sent by courier service. (value of drawing USD6.7m)
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Discrepancy:
Non-negotiable copies of BL not signed.
Comment
Despite the fact that these are never signed, the LC did not request their presentation! They were additional documents. (value of drawing USD2.5m)
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Discrepancy:
Certificate of Origin shows as consignor a party other than the beneficiary.
Comment
LC was silent as regards the content of Certificate of Origin (sub-article 14 (f) would apply). In any event, this issue is specifically covered in sub-article 14 (k). (value of drawing USD3.4m)
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Discrepancy:
Mills Test Certificate is issued by a party other than the beneficiary.
Comment
LC did not indicate the issuer, sub-article 14 (f) would apply. (value of drawing USD3.4m)
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Discrepancy:
Commercial Invoice and Packing List show name of the buyer as "viz. ABC Co Ltd" whereas buyers name is ABC Co Ltd.
Comment
LC actually stated "documents to be issued in the name of buyer "viz. ABC Co Ltd"." Beneficiary merely copied what the LC requested!! In any event, "viz" would be considered to be the equivalent of "i.e.". (value of drawing USD380k)
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Discrepancy:
Beneficiary declaration as per clause 5 of the LC is not presented.
Comment
Beneficiary presented the required document under the title "Beneficiary Certificate". (value of drawing USD8.7m)
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Discrepancy:
Commercial Invoice presented showing the goods description as per field 45A but without the two statements "partial shipment to be allowed" and "goods will be carried under deck".
Comment
LC quoted a goods description (in field 45A) that included "partial shipment to be allowed" and "goods will be carried under deck". These two conditions were clearly copied from the proforma invoice or contract and were intended to reflect conditions to be expressed in the LC. In any event, a full shipment was made and there was no evidence that the goods were shipped on deck. (value of drawing USD5.1m)
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Where a nominated bank or beneficiary faces discrepancies such as those shown above, they should contest them rigorously using the terms and conditions of the credit, the applicable rules of UCP 600, international standard banking practice and ICC Opinions and DOCDEX decisions to support their stance.
Let us hope that some sanity returns in the months to come and that we can get the letter of credit back to what it should be - a payment instrument!
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