assignment of proceeds under standby letter of credit

A Comprehensive Guide to Standby Letters of Credit (2021)

In this extremely comprehensive guide to standby letters of credit (SBLC), we cover:

• What a standby letter of credit is
• Why SBLCs are used more commonly in the USA
• Risks and considerations to be aware of when using standby letters of credit
• An overview of the different types of SBLC available
• The differences between SBLCs and other similar instruments including demand guarantees
• The rules and regulations you need to know about when using standby letters of credit

The guide is written by Glenn Ransier , Technical Advisor, ICC Banking Commission and the Head of Documentary Trade and Standby LCs with Wells Fargo Bank in North America.

Let's get started. (Note this is a long guide, if you'd rather download the PDF version to read later, you can do so here )

What is a Standby Letter of Credit?

The global rule sets which govern standby letters of credit (SBLC) - both the Uniform Customs and Practices current revision 600 (UCP 600) and International Standby Practices current revision (ISP98) - define a SBLC as an “undertaking”.  An undertaking provides the named beneficiary with an “independent” assurance of payment from the undertaking’s issuer (issuers are most often banks).

The obligations of the SBLC or “undertaking” supplement, and are in addition to, any other underlying contract/agreement between the issuer’s client (In SBLC terms, the client is most often referred to as the applicant) and the client’s contract counterparty (In SBLC terms, the counterparty is known as the beneficiary).

When the issuer bears a stronger credit rating, a SBLC is also a credit enhancement tool.   An applicant’s ability to obtain a SBLC from an issuer reflects good faith as the SBLC supports an applicant’s credit quality.

In most cases and depending on the nature of the type of SBLC being issued, a beneficiary is typically only authorized to claim payment from an issuer in situations where the applicant is unable to successfully conclude the underlying contract.

While a SBLC may include a reference to an underlying contract between an applicant and a beneficiary; the issuer’s obligations remain fully independent of any underlying contract to which it may be supporting.

As an independent undertaking, the issuer of the SBLC  has its own obligation to ultimately pay the beneficiary (or another bank which has already paid the beneficiary such as a confirming bank) on receipt of a document/presentation made by, or on behalf of the beneficiary, which comply with the terms and conditions of the SBLC.

However, most SBLCs never receive a drawing, (also known as: claim or demand for payment) and simply expire in accordance with a SBLC’s stated expiry date/period.  This is because most applicants will successfully complete their contractual obligations and as such, the beneficiary will have no reason to demand payment under a SBLC.  Upon a standby letter of credit’s expiry, it will simply cease to exist and be unavailable for drawing and closed by the issuer.

Unless otherwise stated in a SBLC, standby letters of credit are deemed: “irrevocable” meaning they cannot be changed or cancelled prior to its stated expiry date without the agreement of all parties.

Example of a typical process flow for a SBLC SBLC issuance process – direct to beneficiary or utilizing an advising bank

Benefits of using SBLCs

• A bank’s SBLC substitutes and may enhance or replace the creditworthiness of the applicant for that of the issuer of the standby letter of credit.
• SBLC undertakings support/collateralize “any” type of underlying contract, agreement, or obligation between an issuer’s client/applicant and the applicant’s client/counterparty, the beneficiary.
• SBLCs are recognized globally as an effective means of securing cross-border and domestic contracts.

How are SBLCs commonly used?

Banks following BASEL or Dodd-Frank requirements will classify their issued or confirmed SBLCs as supporting either a “financial” or a “performance” obligation. These two classifications are defined as:

• “Financial” SBLCs are issued to back financial obligation or some form of indebtedness, such as loan repayment, and irrevocably obligate the Issuer in the event the Applicant fails to honor their payment obligation.
• “Performance” SBLCs are issued to back a company’s performance related duties. These are contractual, non-financial obligations such as: completing the building of a road or wind farm, etc. and irrevocably obligate the Issuer in the event the Applicant fails to perform as agreed.

Who are the parties involved in a Standby Letter of Credit?

Advising bank –The beneficiary will typically request that a SBLC is sent to a bank in their country or one with which the beneficiary has a relationship. If the beneficiary does not request a specific bank, the issuing bank will either: send the SBLC directly to the beneficiary or choose to send the SBLC to the beneficiary through a bank with which the issuer has a relationship.

If the issuer sends the standby letter of credit through another bank, the bank that receives the SBLC and sends it to the beneficiary will be known as the advising bank. The advising bank is not a party to a SBLC and has no authority to approve or disapprove an amendments terms or obtain drawing rights.

Applicant - (also known as an instructing party or requesting party) – The SBLC applicant enters into a contract with a counterparty. When the contract requires a standby letter of credit to support it, the applicant will make a request, typically to its bank, to issue a SBLC in favour of its contract’s counterparty. In SBLC terms, the counterparty becomes the beneficiary.

In the underlying contract, the applicant and beneficiary terms associated with SBLCs may have very different names: e.g. lender and borrower; buyer or seller; principal and drawer; etc.

It must be noted that a SBLC’s stated applicant may or may not be the issuer’s client. An applicant may receive silent or openly known support to have a standby letter or credit issued. For example, Company AZA may have insufficient credit or collateral to induce an issuer/bank to issue its SBLC. In such a case, it can enlist its parent, a factoring company, etc. to lend support to help Company AZA be named as the applicant in the SBLC.

The parent or other company providing the support may or may not be stated in the SBLC; however, it is considered the client/applicant of the issuer versus the applicant stated in a SBLC. An applicant is not deemed a party to an SBLC. They are the party which requests an issuer to issue its independent SBLC in favour of a beneficiary.

Beneficiary – is the undertaking party who receives all the benefits of a SBLC. They are the only party who may make a drawing; receive payment against the SBLC and/or accept or reject amendments, etc. In the underlying contract, the applicant and beneficiary terms associated with SBLCs may have very different names: e.g. lender and borrower; buyer or seller; principal and drawer; etc.

Confirmer or Confirming Bank –confirmation may only be added at the request of an issuer. When added, a confirmer or confirming bank becomes similar to a second issuing bank because, like the issuer, the confirmer undertakes to honour (or negotiate) or pay a complying document presentation. The confirmer’s undertaking is in addition to the issuers undertaking, but it may be limited in several manners, such as: a) amount; b) expiry; and c) allowable languages documents may be presented in, etc.

Issuer or Issuing Bank or Opening Bank – is the party that issues a separate, irrevocable, independent SBLC on behalf of its applicant client. Because it is independent, a SBLC is separate and distinct from any underlying contract on which it may have been based. Because it is irrevocable, a SBLC cannot be amended until all parties agree to the amendment.

Nominated Bank is the bank/party authorized by the issuer to undertake honour, negotiate or otherwise make a payment in the event it receives a complying document presentation/demand. A confirmer is most often a nominated bank.

A nominated bank which has not confirmed or otherwise committed to pay in some form has no obligation to do so. Unless a confirmer is involved in a SBLC, it rare to see a nominated party as the majority of SBLCs expire and are only available for payment with the issuer.

Why are SBLCs more commonly used in the United States?

Banks in the U.S. historically did not have the corporate power to issue certain types of guarantees but have generally always had the power to issue letters of credit (LC).

It was relatively simple to take conventional commercial LCs and adjust the drawing conditions to call for documents like default certificates and demands for payment, rather than on board negotiable bills of lading, invoices, and other typical shipping and commercial documents. This meant SBLCs could evolve from commercial LCs. It is harder to convert an ordinary, dependent guarantee into an independent undertaking.

Risks and considerations to be aware of when using SBLCs

Applicant considerations: There is a cost associated with SBLC transactions.

An applicant is not a party to an SBLC. The applicant is a party to an underlying contract while the issuer of the standby letter of credit is not. The applicant requests a SBLC to be issued. However, once issued, the issuer must then make its own, independent examination and payment decisions independent of input from the applicant and what the terms of an underlying contract state.

An applicant should have a relationship comfort with the intended SBLC beneficiary because most standby letters of credit are payable against only a draft/bill of exchange and a simple drawing statement. This allows for the possibility for an improper drawing.

Once a SBLC is issued, all parties must agree to any amendment or cancellation request unless the SBLC has expired.

Applicants must align the contract’s terms with the SBLC especially in the area of drawing requirements. Because a standby letter of credit is documentary, an issuer is not concerned with the underlying contract and will make its payment decision solely upon reviewing a beneficiary’s document presentation on its face, against an SBLCs terms, without seeking confirmation of fact(s), action(s) or statement(s) made by the issuer of any document contained in the presentation.

Beneficiary considerations: A beneficiary must determine its credit rating of the issuer. Where an issuer’s credit rating, size or country risks are unacceptable to the beneficiary, a beneficiary may require an acceptable confirming bank.

Once the beneficiary receives a SBLC, it should ensure that SBLC wording complies with the requirements of the underlying contract e.g.

• Can a beneficiary legally make the required statements and are all reasons they can make a demand for payment properly addressed?
• Does the SBLC expire with sufficient time to complete the underlying contract?
• Can the beneficiary obtain all required drawing documents?

This upfront review will help to assure success if the beneficiary makes a drawing against the SBLC, understanding that when a presentation does not comply with a SBLC’s stated terms/conditions, an issuer is not obligated to pay.

The SBLC should be made subject to its preferred international rules such as ISP98 versus UCP600 as the rules align everyone involved with a SBLC and may also assist in the case of a legal matter.

Confirmation and/or advising costs may be due by the beneficiary.

Issuer considerations: As the issuer is supporting its applicant, it needs to consider the applicant’s credit rating. They also need to consider their ability to complete the underlying contract/agreement, often without reviewing the contract/agreement.

Reputational and/or compliance risks such as money laundering, collusion between an applicant and a beneficiary, supporting an unpopular contract/agreement, etc. should also be considered.

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Types of SBLC

Here is an overview of the most common types of SBLC.

Advance payment

This SBLC’s purpose is to ensure the repayment of an advance payment which a buyer has made (or will make at a contract’s closing) to the supplier of goods or services.

In connection with large contracts, especially international transactions, the parties will agree that a supplier of goods or services must receive a certain percentage of the overall contracted value, e.g. 10% upon signing of the contract. To safeguard the buyer against losing its advance payment, they will require an SBLC naming them as the beneficiary to secure the repayment of the sum(s) advanced should the contracted goods or services not be delivered or completed.

The SBLC ensures the buyer is made whole for any advance made. However, often these types of SBLC’s do not provide remuneration for any loss of interest or profit margins that the buyer may sustain.

Bid or tender bond

Supports an issuers' client’s bid to be awarded for a project or contract mandate. This type of SBLC assures the beneficiary that if selected, the applicant has the ability to support and comply with its bid and that they will honour the bid if they are selected. Most often used by contractors or construction companies, they are typically needed for a portion of the overall project’s value.

A SBLC which generally requires only the presentation of a draft or bill of exchange without the need of any supporting statements whatsoever. From an applicant and/or an issuers perspective, these are considered the riskiest type of SBLC. This is because a beneficiary will be able to draw for any reason. It is also risky because the simple terms of the SBLC with regards to a presentation or drawing requirement makes it difficult to stop an improper drawing.

Supports an applicant’s payment obligations to pay for goods or services on a one-off or ongoing basis in the event of non-payment by other methods.

Direct Pay LCs are hybrid SBLCs issued to provide a credit enhancement to a bond offering. E.g. industrial revenue bond, also commonly referred to as variable rate demand bonds. These types of SBLC are most often issued in favour of the bond trustee. Unlike the majority of SBLCs, they are the primary payment mechanism for the interest and principal due on the underlying bond and will receive periodic drawings for payment.

A large majority of SBLCs will fall into this category.  These standby letters of credit will support any financial payment obligation such as loan repayments, etc.

These SBLCs address the insurance or reinsurance obligations of the applicant and are used by insurance companies to distribute insurance risks among themselves. Rather than cash collateralizing other insurers or beneficiaries for use of their internal lines of credit, these SBLC’s are used as collateral.

Performance

A performance SBLC is used to secure the applicant’s satisfactory fulfilment of its contractual performance obligations toward the beneficiary. For example, should the applicant fail to perform a contracted duty such as: complete a construction project, or repair equipment, or build a home or road within the contracted specifications and/or timelines, then the beneficiary will be entitled to present a drawing statement.

Counter SBLC

An applicant or the beneficiary may require a local SBLC to be issued directly by an overseas, reputable party - most often a bank - in the same country as the beneficiary.

The applicant may not have the means or would prefer not to open another line of credit with an overseas party to facilitate this limited need. In this case, they would request an issuer to issue a counter SBLC. The counter SBLC provides collateral to a local party or bank (often a correspondent of the issuer of the counter-undertaking), to induce that bank to issue its own separate and distinct, local undertaking.

In these instances, there are two undertakings:

• The 1st is the counter-SBLC between the issuer and the local bank
• The 2nd is the local undertaking between the local issuer and the beneficiary

The undertaking type and/or their governing rule sets do not need to be like for like. Each bank has its own policies toward issuing and receiving counter SBLCs.

Through the use of counter SBLCs, a client maintains a single line of credit.

A counter SBLC may be necessary in the following scenarios:

• Beneficiary requires/demands a local SBLC or guarantee;
• Beneficiary requires a “local bank” to issue the final undertaking and will not allow another local bank to advise or confirm it;
• The undertaking or guarantee must be subject to laws outside of the issuer’s policies.

The beneficiary of the counter-SBLC is the financial institution requested to issue its own instrument. The beneficiary of the second instrument is the applicant’s counterparty in the underlying contract/agreement.

The drawing requirements for a counter-SBLC generally require a simple statement that the second financial institution received a demand for payment against the instrument it issued. The drawing requirements under the second instrument will have ultimately been provided by the applicant of the counter SBLC issuer.

Example of a typical process flow for a counter SBLC

What is the difference between an SBLC and a Commercial Lettter of Credit?

Costs – Costs between SBLCs and Commercial LCs usually differ.

At a high level both types of LC typically require an issuer to consider factors such as:

• Applicant/client size
• Collateral and required line of credit size
• The issuer’s internal LC processing costs
• Credit establishment and compliance risk costs
• The differences of the types of LCs anticipated to be requested

Depending on the laws applicable to the Issuer, there may be different cash reserve loss requirements needed for commercial LCs vs performance SBLCs vs financial SBLCs, (Note: This is the case for all countries following Basel) which may affect the issuing/opening fee.

Both LC types will require an applicant to pay an issuance fee of some type. However, commercial LCs are expected to have at least one, if not multiple document presentations. Each presentation will typically be assessed by an examination fee of some type. Conversely, most SBLCs do not receive a beneficiary’s document presentation or drawing and so no examination related fees will be assessed.

Where a SBLC generally covers longer term and ongoing contracts, the issuance fee is needed for the duration of the SBLC.

Commercial LCs are typically issued to support a single need e.g. to cover a payment for: a) a shipment of goods; or b) services completed. They typically expire earlier than a SBLC.

For applicants and beneficiaries which routinely transact, a longer term SBLC may be the more economical LC undertaking, instead of issuing multiple commercial LCs. The commercial LCs will be assessed multiple issuance and examination fees.

Document presentations – Commercial LCs are a beneficiary’s primary payment option. Rather than relying on the underlying contract for payment, the beneficiary will request payment from the issuer’s independent commercial LC undertaking in settlement of the underlying contract they have with the applicant. Conversely, SBLCs take the opposite view and, in the overwhelming majority of cases, the issuer of a SBLC does not expect to receive a document presentation nor make a payment.

As a secondary payment option to the beneficiary, if a document presentation/demand is received, it generally means that the applicant has failed to meet its terms against the underlying contract.

Document types – Commercial LCs require documentary presentations which usually consist of commercial documents such as commercial invoices, packing or weight lists, transport documents, etc. SBLCs are payable most often against simple beneficiary statements and the documents presented often have no intrinsic value.

Misstatements/Fraud – Understanding the difference with document types outlined above, the possibility of a beneficiary requesting a payment in error, by accident or purposely are greater with a SBLC. While a very rare occurrence, it is recommended that the applicant and beneficiary have an established relationship when dealing with SBLCs.

Duration - Commercial LCs are typically short term in nature and their expiry date is generally 6 months or less. SBLCs most often cover longer term contracts, and their duration may be years in length on an overall basis.

Tenors – Any LC undertaking must define the period when a complying document presentation is due for payment and this period is known as the LC’s tenor. As LC undertakings, both Commercial LCs and SBLC’s can be payable “at sight”. This means upon a reasonable time from when the nominated or issuer has found the documents to comply with an LC’s terms.

Conversely there also exists time tenors, which detail that a payment is to be made at a fixed future certain date from the time a presentation is found to be complying. Time tenors are typically referred to as Deferred Payment Undertakings or Banker’s Acceptances. One term, “Negotiation”, may be used as a sight or time tenor.

Commercial LCs often include some form of financing need for trade and, as such, time tenors are utilized. SBLCs which generally do not expect a presentation or demand for payment will overwhelmingly use the sight tenor.

Terms and Conditions – Given their very different payment needs, the data content of commercial versus SBLCs differs significantly.

Purpose  – Commercial LCs facilitate trade and are issued with the intention that a document presentation will be delivered to a bank for payment for a shipment of goods or payment for services.  They are the primary payment vehicle for the beneficiary.

On the other hand, SBLCs cover any type of contract or agreement between two parties.  Provided the issuer is willing to support its applicant, the type of contract a SBLC can support is boundless and includes the different types we covered above (which is not an exhaustive list).

When an applicant does not meet its contracted duty(ies), the beneficiary will make a claim against the applicant for payment under the underlying contract.  When the applicant fails to honour the request for payment, the beneficiary will make a presentation for payment against the SBLC making it a secondary payment vehicle, or payment of last resort for a beneficiary.

SBLCs vs Bank Guarantees

Similar to the commercial LC or a SBLC, a demand guarantee (DG) is an independent and irrevocable “undertaking,” provided by an issuer to a beneficiary, that provides assurance of payment upon receipt of complying document presentations.

DGs are often referred to as first demand guarantees. DGs are more common in Europe, Asia, and the Middle East. SBLCs are more common in the Americas, however they remain globally issued and/or accepted.

Surety or ancillary guarantees should not be confused with DGs and are not the same as LC undertakings. They are outside the scope of this guide.

DGs and SBLCs are extremely similar “undertakings” with the key differences provided by its governing rule set. Like the SBLC, demand guarantees:

• Require the beneficiary to present a compliant documentary demand in order to receive payment against the undertaking
• Are independent from the underlying contract
• Do not require the issuer to investigate the legitimacy of a demand.

When included in a SBLC, UCP600 or ISP98  will govern the instrument and provide a series of default resolutions in cases where a SBLC is silent. Conversely, when included in a DG, the Uniform Rules for Demand Guarantees (URDG 758) will govern and provides it defaults resolutions.

While some defaults are similar, there are significant differences in the approach taken by the rule sets especially in areas such as:

• Force Majeure situations
• Document examination period and approach
• Confirmation
• Allowable payment tenors
• Required notifications to an applicant
• Governing law and jurisdiction
• Replacing a DG or SBLC undertaking lost by a beneficiary
• Some terminology differences e.g. guarantor versus issuing party.

Most banks will require a DG to be subject to the URDG 758 to normalize the roles and responsibilities of each party to the undertaking. Issuing a DG that is silent as to its governing rule set and/or is subject to laws of another country, creates potential risk for the issuer (guarantor is the issuer for DGs) and the applicant. This is because the roles and responsibilities may not be directly addressed, well known or understood.

SBLC rules and regulations

Below is an overview of the key regulations, codes and rules that govern SBLCs.

International Standby Practice (ISP98)

• ISP is a set of rules that when incorporated into an undertaking by referencing the ISP98 or ICC publication 590, will cause the undertaking to be deemed as a Standby Letter of Credit.
• The ISP was approved and endorsed by the International Chamber of Commerce (ICC) in January 1999 (ICC publication 590).
• The ISP took more than five years to create and it was the result of interaction between individuals, banks, and national and international associations.
• The ISP98 is a copyright of the Institute of International Banking Law & Practice (IIBLP) .
• ISP is not law, but it contains resemblances to USA L/C legal doctrine.
• It represents a more comprehensive rule set for SBLCs versus the UCP 600.

Uniform Customs and Practice (UCP 600)

• UCP is a set of rules that that when incorporated into an undertaking, will cause the undertaking to be deemed as a letter of credit.
• The primary focus of the UCP is to govern commercial letters of credit. However, as noted in UCP Article 1 in parenthesis, UCP applies to standby letters of credit “to the extent to which they are applicable”.
• UCP is not a law, rather a set of articles developed by the International Chamber of Commerce (ICC) Banking Commission and others. They are copyrighted by the ICC
• ICC is a non-governmental organization.
• UCP was first published in 1933 making it the oldest and most legally tested rule set. Thereafter revised in 1951, 1962, 1974, 1983, 1993 and its current revision in 2007.
• Receiving a document presentation which contains an extend or pay request e.g. request to extend the expiration date of the SBLC or pay the presentation
• Issuances of counter-SBLCs;
• Examining documents against a SBLC which requires a document to make and/or complete a statement utilizing quotation marks; require a witness, etc.
• What to do in cases where a beneficiary has merged or been acquired after issuance of an SBLC
• Syndicated or participated deals.

Uniform Rules for Demand Guarantees (URDG 758)

• The URDG is a set of rules that that when incorporated into an undertaking, will cause the undertaking to be deemed a demand guarantee (DG).
• URDG 758 entered into effect July 2010 and is a complete revision of the original revision URDG 458.
• The URDG rules support demand guarantees, not surety guarantees.
• Where possible, it was aligned with the concepts of UCP 600; however, its default positions differ from UCP and ISP in a variety of manners.
• URDG 758 now has a companion document titled the International Standard Demand Guarantee Practice (ISDGP) for URDG 758 (ICC publication 814E) . It supplements the URDG by identifying and recording best practice in relation to the URDG rules and beyond.

                                                                                                                                                                                                  Evergreen clauses

Given the long-term expiry nature of SBLCs, they often insert what is commonly referred to as an “Evergreen” or “automatic-extension” clause. The Evergreen Clause allows an SBLC’s expiry date to automatically extend for a fixed period-of-time (e.g. every six months or year).

It also provides an issuer or confirmer and/or the applicant with an exit period (e.g. “unless XX days prior to any then current expiration date, the issuer notifies the beneficiary that the issuer elects not to extend the SBLC”). This allows them the possibility to have the SBLC expiry with a simple cancellation notification and without the need for a beneficiary to agree to an amendment.

However, any cancellation notification must be sent or received by the beneficiary by the notification period indicated in the SBLC’s specific evergreen clause. This is normally anywhere between 30 and 90 days from a then current expiration date.

How Evergreen clauses benefit SBLCs

The applicant, issuer or confirmer is provided with the means to close the SBLC without the need for a beneficiary to consent or otherwise have to agree to an amendment or return an undertaking. (Note: The cancellation is typically sent when the underlying contract is also close to completion, but there remain other reasons for cancellation such as: applicant seeking to replace an issuer for improved costs or other reasons, or an issuer seeking to remove itself from a deal; etc.)

In addition, providing longer-term commitments often requires higher rates/fees. The exit opportunity provided by an Evergreen Clause may keep fees more reasonable.

SBLC frequently asked questions

See the section above that covers this in detail

SBLC undertakings can support “any” type of underlying contract, agreement, or obligation between an issuer’s client or applicant and the applicant’s client/counterparty - the beneficiary - provided the issuer is willing to support the nature of the underlying contract.

The SBLC obligations supplement and are in addition to any other underlying contract/agreement between the issuer’s client, the applicant and the beneficiary. When the issuer bears a stronger credit rating, a SBLC is also a credit enhancement tool.

An applicant could require that a beneficiary must inform them of an intended drawing XX days in advance. The SBLC could require the beneficiary to make this certification and provide some form of documentary evidence; e.g. a copy of an email to ensure it was completed. This notification could allow an applicant to resolve the contract issue negating the need for a drawing.

Conversely, a trusted neutral third party or an applicant could require that a beneficiary’s drawing statement be countersigned or attested by a third party neutral to the applicant and beneficiary; or the applicant or their representative to help ensure that the drawing is warranted (Note: Given the neutrality of a SBLC between an issuer and a beneficiary, having an applicant requirement to countersign or attest to a drawing is discouraged in rules and often prohibited by an issuer and/or a beneficiary).

Most SBLCs have a sight tenor and, as noted throughout this guide, in most cases a SBLC will never receive a presentation or drawing so there is no need to make a payment.

Discounting or prepaying a sight SBLC can be associated with fraud and as such, caution is needed when considering such a possibility.

Yes, and as noted in UCP 600, ISP98 (and URDG 758) and when allowed by applicable law, in certain cases the issuer may issue a SBLC on its own behalf.  In these cases, the issuer becomes the applicant and the issuer.  This is commonly known as a two party SBLC.

About the author

Glenn Ransier Technical Advisor, ICC Banking Commission; Member of URDG 758 drafting team; and Co-Chair for the ISDGP

Head of Documentary Trade and Standby LCs with Wells Fargo Bank N.A .

Email: [email protected]

Disclaimer: Contents represent the author’s sole opinions and may not represent those of any past, present or future employer.

Standby Letter of Credit: Ensuring Payment with Assignment of Proceeds

1. understanding standby letters of credit, 2. benefits of standby letters of credit for buyers and sellers, 3. how standby letters of credit work, 4. types of standby letters of credit, 5. what it is and how it works, 6. using assignment of proceeds with standby letters of credit, 7. benefits of assignment of proceeds for buyers and sellers, 8. standby letters of credit vsbank guarantees, 9. tips for successfully using standby letters of credit with assignment of proceeds.

standby letters of credit (SBLCs) are widely used in international trade to ensure payment for goods and services. They are usually issued by banks on behalf of their clients as a guarantee of payment in case of default. In simple terms, an SBLC is a promise by a bank to pay a specified amount of money to a beneficiary if certain conditions are not met by the applicant. SBLCs are often used in situations where the beneficiary requires assurance that they will be paid, but the applicant is unable or unwilling to provide collateral or other forms of security.

understanding standby letters of credit is essential for anyone involved in international trade. Here are some key points to consider:

1. SBLCs are not the same as commercial letters of credit. While commercial letters of credit are used to facilitate trade by ensuring payment for goods and services, SBLCs are used as a form of financial guarantee.

2. SBLCs are often used in situations where the beneficiary requires assurance that they will be paid, but the applicant is unable or unwilling to provide collateral or other forms of security.

3. SBLCs can be either unconditional or conditional. An unconditional SBLC means that payment will be made to the beneficiary regardless of the circumstances, while a conditional SBLC means that payment will only be made if certain conditions are met.

4. The cost of issuing an SBLC can vary depending on the amount of the guarantee, the length of time it is required, and the perceived risk involved.

5. SBLCs can be transferred or assigned to third parties, which can provide additional security for the beneficiary. For example, an SBLC can be assigned to a supplier to ensure payment for goods.

6. The assignment of proceeds is a common feature of SBLCs. This means that the bank will pay the beneficiary directly from the proceeds of the transaction, rather than relying on the applicant to make payment.

7. There are risks associated with the use of SBLCs, including the possibility of fraud or misuse. It is important to work with reputable banks and to carefully review the terms and conditions of the SBLC before agreeing to use it.

Standby letters of credit are an important tool for ensuring payment in international trade. Understanding how they work and the risks involved is essential for anyone involved in this area of business. By working with reputable banks and carefully reviewing the terms and conditions of an SBLC, businesses can use this tool to manage risk and ensure payment for goods and services.

Understanding Standby Letters of Credit - Standby Letter of Credit: Ensuring Payment with Assignment of Proceeds

When it comes to international trade, there is always a risk of non-payment from the buyer's side, which can cause financial losses for the seller. To avoid this kind of risk, Standby Letters of Credit (SBLCs) are used. They are financial instruments issued by banks that guarantee payment to the seller in case the buyer fails to make the payment. SBLCs are beneficial for both buyers and sellers, as they ensure that the transaction is completed smoothly without any financial loss.

Here are some of the benefits of Standby Letters of Credit for buyers and sellers:

1. Security: Standby Letters of Credit provide security to the seller as they ensure that the payment will be made by the bank in case the buyer fails to make the payment. This reduces the risk of financial loss for the seller.

2. Confidence: Buyers can use Standby Letters of Credit to show their financial capability and confidence to the seller. This can help in building a good relationship between the buyer and seller, which can lead to future business transactions .

3. Flexibility: Standby Letters of Credit are flexible and can be customized according to the needs of the buyer and seller. They can be used to cover different types of transactions, such as payment for goods and services, performance guarantees, and bid bonds.

4. Global acceptance: Standby Letters of Credit are recognized globally, which means that they can be used for international trade transactions . This makes it easier for buyers and sellers to do business with each other across different countries.

For example, a seller in the United States can use an SBLC issued by a bank in the buyer's country to ensure that they receive payment for goods sold to the buyer. This provides security to the seller, as they know that the payment will be made by the bank if the buyer fails to make the payment.

Standby Letters of Credit are beneficial for both buyers and sellers in international trade transactions. They provide security, confidence, flexibility, and global acceptance, which can help in building a good relationship between the parties involved.

Benefits of Standby Letters of Credit for Buyers and Sellers - Standby Letter of Credit: Ensuring Payment with Assignment of Proceeds

Standby letters of credit (SLOCs) are often used in international trade to ensure the payment of goods or services. They provide a level of security to both the buyer and seller, guaranteeing that the agreed-upon payment will be made. SLOCs are issued by banks and are similar to traditional letters of credit, but with some key differences. The primary difference is that SLOCs are only used as a backup in case the buyer is unable to make the agreed-upon payment. Because of this, they are often used in situations where there is a higher risk of non-payment.

Here are some key points to keep in mind when it comes to understanding how standby letters of credit work:

1. A standby letter of credit is a guarantee from a bank that a payment will be made if the buyer is unable to make it. This means that the seller can rely on the bank to make the payment if the buyer is unable to do so.

2. Standby letters of credit are often used in international trade , where there is a higher risk of non-payment. They are also commonly used in the construction industry, where contractors may be required to provide a bond to guarantee their work.

3. Standby letters of credit are not the same as traditional letters of credit. Traditional letters of credit are used to guarantee payment when goods or services are delivered. SLOCs, on the other hand, are only used as a backup in case the buyer is unable to make the payment.

4. SLOCs can be either "unconfirmed" or "confirmed." Unconfirmed SLOCs are issued by the buyer's bank and are not guaranteed by any other bank. Confirmed SLOCs are guaranteed by a second bank, usually in the seller's country. This provides an additional level of security for the seller.

5. In order to receive payment from a standby letter of credit, the seller must provide the bank with proof that the buyer has failed to make the payment. This usually involves providing documentation, such as invoices and delivery receipts, to show that the goods or services were delivered and the payment was not made.

Overall, standby letters of credit are an important tool for ensuring the payment of goods or services in situations where there is a higher risk of non-payment. By providing a level of security to both the buyer and the seller, SLOCs help to facilitate international trade and commerce.

How Standby Letters of Credit Work - Standby Letter of Credit: Ensuring Payment with Assignment of Proceeds

When it comes to standby letters of credit, there are various types that can be used depending on the specific needs of the parties involved in the transaction. Each type of standby letter of credit has unique features that make it suitable for certain situations. It is essential to understand the different types of standby letters of credit to select the most appropriate one for the transaction. In this section, we will discuss the types of standby letters of credit in detail.

1. Financial Standby Letter of Credit: This type of standby letter of credit is often used in financial transactions. It acts as a guarantee that the debtor will pay the creditor if they fail to fulfill their financial obligations. For instance, if a company is borrowing money from a bank, the bank may require a financial standby letter of credit as collateral.

2. Performance Standby Letter of Credit: This type of standby letter of credit is used in business transactions where one party agrees to perform a specific task, and the other party requires assurance that the task will be completed. For example, if a construction company agrees to build a house for a client, the client may require a performance standby letter of credit to ensure that the construction company completes the project.

3. Direct Pay Standby Letter of Credit: A direct pay standby letter of credit is a type of standby letter of credit used in international trade . It guarantees payment to the exporter when the importer defaults on the payment. With this type of standby letter of credit, the exporter can receive payment directly from the issuing bank without the importer's involvement.

4. Bid Bond Standby Letter of Credit: A bid bond standby letter of credit guarantees that the contractor will honor their bid if they are awarded the project. If the contractor fails to honor their bid, the bond will be called, and the project owner can use the proceeds to cover the cost of selecting a new contractor.

Selecting the appropriate type of standby letter of credit is vital to ensure that all parties involved in the transaction are protected. Understanding the differences between the types of standby letters of credit can help you make an informed decision on which one to use.

Types of Standby Letters of Credit - Standby Letter of Credit: Ensuring Payment with Assignment of Proceeds

When it comes to international trade, there are many risks that businesses face. One of the most significant risks is the possibility that a buyer will fail to pay for goods or services provided by the seller. This risk is especially high when dealing with a new or unfamiliar buyer, or when operating in a high-risk country. To mitigate this risk, sellers often require buyers to provide some form of security or guarantee of payment. One of the most common forms of security is a standby letter of credit (SBLC), which ensures payment in the event that the buyer fails to pay. However, even with an SBLC in place, there is still a risk that the buyer may default. To further reduce this risk, sellers may request an assignment of proceeds to be included in the SBLC.

Here are some key points to know about assignment of proceeds:

1. Definition: An assignment of proceeds is a document that instructs the bank to pay the seller directly from the proceeds of the SBLC, rather than paying the buyer. The buyer is still responsible for reimbursing the bank for the amount paid to the seller.

2. Purpose: The purpose of an assignment of proceeds is to provide an additional layer of security for the seller. By being able to claim payment directly from the bank, the seller is protected even if the buyer defaults on payment.

3. Process: The process for implementing an assignment of proceeds is relatively simple. The seller provides the bank with a copy of the invoice and a request for payment under the SBLC. The bank then pays the seller directly from the proceeds of the SBLC, and the buyer is responsible for reimbursing the bank.

4. Advantages: The main advantage of an assignment of proceeds is that it provides an extra layer of protection for the seller. This can be especially important when dealing with new or unfamiliar buyers, or when operating in high-risk countries . Additionally, by being able to claim payment directly from the bank, the seller does not need to rely on the buyer to make payment.

5. Examples: Let's say that a seller in the United States is exporting goods to a buyer in China. The seller requires the buyer to provide an SBLC as security for payment. However, due to concerns about the buyer's creditworthiness, the seller also requests an assignment of proceeds to be included in the SBLC. When it comes time to make payment, the seller provides the bank with a copy of the invoice and a request for payment under the SBLC. The bank pays the seller directly from the proceeds of the SBLC, and the buyer is responsible for reimbursing the bank.

What It Is and How It Works - Standby Letter of Credit: Ensuring Payment with Assignment of Proceeds

Using Assignment of Proceeds with Standby Letters of Credit is a common practice in international trade transactions. It ensures that the seller receives payment when the buyer defaults on payment. The Assignment of Proceeds is a legal agreement between the seller and the issuing bank that allows the bank to release the payment to the seller when the buyer fails to make the payment. This type of arrangement benefits both parties as the seller is assured of payment while the buyer is given time to arrange for alternative financing.

Here are some key points to consider when using Assignment of Proceeds with Standby Letters of Credit:

1. The use of Assignment of Proceeds with Standby Letters of Credit provides security for the seller as it ensures that payment will be made even if the buyer defaults on payment.

2. The seller can use the Standby Letter of Credit as collateral for a loan or as proof of creditworthiness.

3. The Assignment of Proceeds must be agreed upon by all parties involved in the transaction, including the buyer, the seller, and the issuing bank.

4. The Assignment of Proceeds should be drafted by a legal professional to ensure that all parties are protected and that the agreement is legally binding.

5. In some cases, the buyer may object to the use of Assignment of Proceeds as it may limit their ability to arrange alternative financing. It is important to address any concerns that the buyer may have before entering into the agreement.

For example, a seller in the United States may use Assignment of Proceeds with Standby Letters of Credit when selling goods to a buyer in China. The seller can request that the buyer provide a Standby Letter of Credit issued by a Chinese bank. The seller and the issuing bank can then agree on an Assignment of Proceeds that ensures that the seller will receive payment even if the buyer defaults on payment. This arrangement provides security for the seller while giving the buyer time to arrange for alternative financing if needed.

Using Assignment of Proceeds with Standby Letters of Credit - Standby Letter of Credit: Ensuring Payment with Assignment of Proceeds

When it comes to international trade, securing payment for goods and services is a top priority for both buyers and sellers. One way to ensure payment is through the use of standby letters of credit (SBLCs), which provide a guarantee from a bank that payment will be made if certain conditions are met. However, even with an SBLC in place, there can still be risks involved. This is where the assignment of proceeds comes in, providing an additional layer of security for both parties involved.

1. For buyers, the assignment of proceeds ensures that payment will only be made once the goods or services have been delivered and accepted. This means that the buyer can be sure they are not paying for something that they have not received, reducing the risk of fraud or non-delivery.

2. Sellers also benefit from the assignment of proceeds , as it provides them with the assurance that they will be paid for their goods or services. By assigning the proceeds of the SBLC to the seller, they can be sure that they will receive payment, even if the buyer defaults on their obligations.

3. Another benefit of the assignment of proceeds is that it can help to streamline the payment process. By assigning the proceeds directly to the seller, the need for additional documentation or approval from the buyer is eliminated, allowing for faster payment and reduced administrative costs.

4. Finally, the assignment of proceeds can also help to mitigate risk for the issuing bank. By ensuring that payment is only made once the goods or services have been delivered and accepted, the bank can be sure that they are not releasing funds unnecessarily, reducing the risk of fraud or other financial losses.

For example, let's say a company in the United States is buying goods from a supplier in China. The supplier requires payment before shipping the goods, but the buyer is understandably hesitant to send payment without any guarantees. By using an SBLC, the buyer can ensure that payment will be made once the goods have been delivered and accepted. However, the buyer is still concerned about the risk of non-delivery or fraud. By using an assignment of proceeds, the buyer can assign the proceeds of the SBLC directly to the seller, providing them with the assurance that they will be paid for their goods once they have been delivered and accepted. This ensures a smoother transaction for both parties involved.

Benefits of Assignment of Proceeds for Buyers and Sellers - Standby Letter of Credit: Ensuring Payment with Assignment of Proceeds

When it comes to international trade, financial institutions and banks play a crucial role in ensuring that transactions are completed smoothly and efficiently. Standby Letters of Credit (SBLCs) and Bank Guarantees (BGs) are two popular types of financial instruments that can provide security and assurance to parties involved in a transaction. While both types of instruments serve similar purposes, there are some key differences between them.

1. Definition: Standby letters of Credit and Bank guarantees are types of financial instruments that are issued by banks. They are essentially a promise by the bank to pay a certain amount of money to the beneficiary if the applicant fails to fulfill their obligations.

2. Purpose: Both SBLCs and BGs provide assurance to the beneficiary that they will receive payment in the event that the applicant fails to fulfill their obligations. They are often used in international trade transactions to ensure that the seller receives payment for goods or services provided.

3. Assignment of Proceeds: One key difference between SBLCs and BGs is that SBLCs can be used with an Assignment of Proceeds. This means that the beneficiary can assign their rights to receive payment to a third party, such as a supplier or financier. This can provide additional security and assurance to the beneficiary.

4. Duration: SBLCs are often used for longer-term transactions, while BGs are typically used for shorter-term transactions. SBLCs can be issued for up to five years, while BGs are usually issued for one year.

5. Cost: The cost of SBLCs and BGs can vary depending on a number of factors, such as the amount of the instrument and the creditworthiness of the applicant. Generally, SBLCs tend to be more expensive than BGs.

6. Example: For example, if a buyer in the United States wants to purchase goods from a supplier in China, the supplier may require the buyer to provide an SBLC or BG to ensure that they will receive payment for the goods. The buyer can approach their bank to issue an SBLC or BG, which will provide assurance to the supplier that they will receive payment.

Both Standby Letters of credit and Bank guarantees can provide security and assurance in international trade transactions. While they serve similar purposes, there are some key differences between the two that should be considered when deciding which instrument to use.

Standby Letters of Credit vsBank Guarantees - Standby Letter of Credit: Ensuring Payment with Assignment of Proceeds

Successfully using standby letters of credit with assignment of proceeds can be a complex process that requires attention to detail and a thorough understanding of the involved parties' roles. The use of standby letters of credit with assignment of proceeds can be an effective way to ensure payment for goods or services, but it requires proper execution. To help you navigate this process, here are some tips to keep in mind:

1. Know your role: It's important to understand your role in the process when using standby letters of credit with assignment of proceeds. If you're the beneficiary of the letter of credit, you need to be aware of the terms and conditions of the credit . If you're the applicant, you need to ensure that you're meeting all the required obligations.

2. Understand the terms and conditions: It's essential to read and understand the terms and conditions of the standby letter of credit. This includes the expiration date, the amount of the credit, and the documents required to draw on the credit.

3. Choose the right bank: Choosing the right bank is crucial when using standby letters of credit with assignment of proceeds. The bank must be a reputable institution with experience in handling these types of transactions.

4. Provide accurate documentation: The documentation required to draw on the standby letter of credit must be accurate and complete. Any errors or omissions could delay payment or result in the credit being rejected.

5. Be aware of the timing: It's important to be aware of the timing involved in the process. Standby letters of credit typically require a waiting period before payment can be made. It's essential to plan accordingly to avoid any delays in payment.

For example, let's say a company in the United States is importing goods from a supplier in China. The supplier requires payment before shipping the goods, and the buyer wants to ensure that the supplier fulfills their obligations before releasing payment. The buyer can use a standby letter of credit with assignment of proceeds to ensure that payment is made only when the goods are shipped and the required documentation is provided. By following the tips above, the buyer can ensure a smooth and successful transaction.

Tips for Successfully Using Standby Letters of Credit with Assignment of Proceeds - Standby Letter of Credit: Ensuring Payment with Assignment of Proceeds

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Standby Letter of Credit in Trade Finance | Practical Law

Standby Letter of Credit in Trade Finance

Practical law practice note w-028-9387  (approx. 23 pages).

Assignment of Proceeds

Assignment of Proceeds . It is a legal mechanism by which the beneficiary of a letter of credit may pledge the proceeds of future drawings to a third party. Assigning proceeds involves giving the letter of credit to a financial institution, which holds the letter of credit until drawn upon, along with irrevocable instructions to the financial institution to disburse proceeds,when generated, in a specified way (such as pay 40 percent of each drawing to XXX Corporation). The financial institution acknowledges the assignment to the assignee. It does not have any obligation to pay any funds to the assignee unless the letter of credit is drawn upon by the beneficiary and payment is received from the issuing or confirming financial institution. An assignment of proceeds is not an assignment or transfer of the letter of credit and the assignee acquires no rights to perform under the letter of credit in order to generate funds.

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Assignment Of Letters Of Credit And Proceeds

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Table of Content

What does SBLC stand for?

What is sblc used for, who can issue sbcl, how to get sblc, types of sblc, how does an sblc work, how much does an sblc cost, advantages of sblc, what is the difference between lc, sblc, and bank guarantee, faqs on sblc.

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21 January 2021

SBLC | Standby Letter of Credit | Meaning & The complete guide to its process

‘Standby Letter of Credit (SBLC) is a type of letter of credit (LC) where the issuing bank commits to pay to the beneficiary if the applicant fails to make the payment.

SBLCs, unlike other types of LCs , are a type of contingency plan. In the case of other LCs, the bank makes the payment first, and then the applicant pays to the bank at a later date. However, when a bank issues an SBLC, they are only required to make the payment if the buyer or the applicant defaults.

Any bank or NBFC can issue an SBLC once they are confident about the creditworthiness of the applicant . This is because the banks or the issuing institutions are exposed to the highest risk in the process.

In order to obtain a standby letter of credit, a buyer has to contact a bank and establish their creditworthiness. The bank may ask for additional collateral if the risk or the amount is too high. Once the buyer fulfills all the conditions and the bank deems them fit for receiving the credit, the bank issues them an SBLC and charges 1% to 10% of the total amount as an annual fee for as long as the standby letter of credit is valid.

1) Financial Standby Letter of Credit

A financial SBLC guarantees payment to the seller or the service provider for the goods or the services rendered as per the agreement within the stipulated time frame.

Example: If an edible dye manufacturer sends a shipment to a soft drink company against a financial SBLC, and the company is unable to pay for it, the issuing bank will step in and pay the manufacturer for the dye. Later on, the soft drink company would have to pay the full amount and interest to the issuing bank.

2) Performance Standby Letter of Credit

A performance SBLC is less commonly used compared to a financial SBLC. Performance SBLCs provide a guarantee of completion of a project as per the agreement or the contract. If the service provider fails to complete the project within a stipulated time frame, the bank steps in and reimburses the client.

Example: An IT company hires a contractor to construct a new office. The contractor agrees to complete the construction within a specific time frame but fails to deliver. However, if this deal is protected by a performance SBLC, the issuing bank will pay entire project fees to the IT company and will charge penalties to the contractor. This acts as a safety check to ensure that heavy budget projects are completed in a timely fashion.

3) Advance Payment SBLC

Advance Payment Standby LC provides security against one party’s failure to pay the other party’s advance payment.

4) Bid bond/ Tender SBLC

Bid bond/Tender Standby LCs act as a security against failure to complete the project once the applicant has been awarded the bid or the tender for it.

5) Counter SBLC

Also known as a backstop or a protective standby, Counter SBLC is a type of LC issued by a bank in one country to a bank in another country, asking them to issue a new standby LC to their local beneficiary.

6) Direct Pay SBLC

Direct Pay SBLCs act as a security in the instance of financial instability of the applicant. A direct pay standby is irrevocable.

7) Insurance SBLC

Insurance SBLC provides support to the beneficiary in case the applicant has committed for insurance or reinsurance but fails to do so.

8) Lease Support SBLC

A lease support SBLC is issued by the bank representing the tenant to the landlord. The bank generally takes a deposit as collateral for the SBLC. It pledges to pay the rent to the landlord in case the tenant is not able to do so.

Here’s a step by step process of how an SBLC works:

The process of obtaining an SBLC is fairly simple and similar to that of obtaining any other type of LC or a loan from a bank. A buyer simply walks into a bank or a financial institution and applies for an SBLC.

The bank then starts looking into the creditworthiness of the applicant and decides whether or not the person should be credited with the SBLC. The bank looks into the financial history of the applicant as well as their credit reports and ratings.

If the bank suspects that the buyer will not be able to honor the LC, they may ask for additional collateral to be provided. The size of the collateral depends on the risks as well as the nature of the business.

Once the buyer establishes sufficient creditworthiness, the bank asks for the details of the agreement between the buyer and the seller. Information such as the seller’s name and address, company details, the time period for which SBLC is to be taken as well as shipping documents, etc., are submitted to the bank.

Once the bank is satisfied with all the information at their disposal and their background checks have yielded satisfactory results, it provides an SBLC to the buyer. The bank charges 1% to 10% of the amount of SBLC as a yearly fee, and it’s applicable until the SBLC is valid.

If the buyer meets its obligations in the contract before the due date, the bank will terminate the SBLC without a further charge to the buyer. Once the buyer pays the seller for the goods or the services, the bank terminates the SBLC and doesn’t charge him beyond that point.

As discussed above, SBLC is not actually meant to be used and only acts as a security against default. It comes into action if the buyer is not able to honor the agreement with the seller, the seller goes to the bank and submits the proofs as mentioned in the SBLC. Once the bank verifies the proofs, they release the payment to the seller. The buyer then makes the payment to the bank at a later date along with interest.

Of the total SBLC amount, banks charge about 1% to 10% as annual fees -- depending on the risks and the amount. The charges are applicable as long as the SBLC is valid.

Bridges Trust Deficit

Lack of trust and fear of payment default is one of the key reasons why some international trade deals don't take off. An SBLC is the best way to bridge the gap and ensure that all the worst-case scenarios are dealt with.

Serves as a great proof of creditworthiness

Once a reputed financial institution lends someone a standby letter of credit, they’re practically making a statement about their and their company’s financial situation. This goes a long way in establishing creditworthiness.

Can help with business acquisition

Businesses that are just starting might fail to land big projects because they have no legacy to back them. Companies often get cold feet about working with such individuals or businesses. However, with an SBLC, they have a solid backing of a reputed financial institution and hence can successfully compete for prestigious contracts and big-ticket projects.

The fundamental difference between a Letter of Credit and a standby letter of credit is that the former can be encashed or discounted during a trade transaction. While an SBLC is just a safety measure and is only encashed if any of the parties fail to honor the agreement, one cannot get an SBLC discounted if there is no default. Most trades are honored by all the parties without any irregularities and hence the SBLC is discontinued once the trade takes place.

On the other hand, while a bank guarantee only protects the buyer against a non-performing seller, SBLCs protect both the buyer and the seller -- depending on the type of SBLC issued.

1. Is SBLC safe?

Standby Letters of Credit are highly secure documents that guarantee the payment for the goods in case the buyer defaults or is unable to pay as per the agreement.

2. How do you use SBLC?

An SBLC is used as a safety mechanism in a trade to ensure that the agreement is honored by both parties.

3. Can SBLC be confirmed?

Yes, an SBLC can be confirmed just like a normal letter of credit.

4. Can SBLC be canceled?

The SBLC is an irrevocable document and hence it cannot be canceled without the consent of all the parties involved.

5. Can SBLC be monetized?

Yes, SBLC can be monetized.

6. Can SBLC be transferable?

An SBLC is transferable in that the beneficiary can sell or assign the rights to the proceeds from the SBLC, but the beneficiary remains the only party who can demand payment of the SBLC.

7. Can SBLC be done without upfront payment?

Many companies and service providers claim that they do provide SBLC without upfront payment. However, experts call it a myth and say that there can be no SBLC without any upfront payment since the risk is too high.

8. Is SBLC legal in India?

Yes, SBLC is legal and fully operational in India when issued by banks certified by the Reserve Bank of India.

9. Can SBLC be discounted?

Yes, an SBLC can be discounted and is often considered a great investment instrument.

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Standby and Commercial Letters of Credit, Third Edition alerts you to current developments and discusses the recent UCP600, former UCP500, ISP98, UCC Article 5, and current trade practices and problems. The authors review letter of credit law and practices, helping to resolve concerns of applicants, beneficiaries, and issuers.

This essential resource includes:

• Sample forms and clauses, procedures and checklists
• Current court cases and extensive Table of Cases
• What can happen to letters of credit in bankruptcy and insolvency proceedings
• Fraud and injunction nightmares
• Cross-reference table UCP600 and UCP500
• Strategies for bank reimbursement agreements

Standby and Commercial Letters of Credit, Third Edition gives you immediate guidance when you need it most. And it supplies real-world letters of credit situations, with analyses of what was done right and wrong.

Note: Online subscriptions are for three-month periods.

Table Of Contents

Chapter 1. Meet This Book

• §1.01 If You Read No Further …
• §1.02 The Third Edition: For Whom and What's New
• §1.03 Letters of Credit: A Thumbnail History
• §1.04 Risks of Letters of Credit: Tough Times Checklist
• §1.05 Letters of Credit vis-à-vis Contracts
• §1.06 “The Program”: Terminology in This Book

Chapter 2. Definitions and Distinctions

• §2.01 Definitions About Letters of Credit Quibbler's Corner—What's in a Name?
• §2.02 Commercial Letters of Credit
• §2.03 Drafts and Banker's Acceptances
• §2.04 Standby Letters of Credit
• §2.05 Use of Definitions
• §2.06 The Independence Principle
• §2.07 Distinctions from Other Instruments
• §2.08 International Demand Guarantees
• §2.09 Documentary Collection
• §2.10 “Standard Banking Practice”
• §2.11 Trade Finance Alternatives

Chapter 3. Nomenclature for Credits

• §3.01 Introduction
• §3.02 Acceptance Credit
• §3.03 Advised Credit and Specially Advised Credit
• §3.04 Back-to-Back Credit
• §3.05 Circular Credit and Circular Negotiation Credit
• §3.06 Clean Credit
• §3.07 Commercial Letter of Credit
• §3.08 Confirmed Credit
• §3.09 Counter Credit
• §3.10 Deferred Payment or Deferred Sight Credit
• §3.10A Direct Pay Credit
• §3.11 Documentary Credit
• §3.12 Domestic Credit
• §3.13 Financial Guarantee-Type Standby Letter of Credit
• §3.14 Firm Credit
• §3.15 Foreign, Export-Import, or Transit Credit
• §3.16 Inoperative Credit
• §3.17 Irrevocable Credit
• §3.18 Negotiation and Nomination: Discussion
• §3.19 Negotiation Credit
• §3.20 Notation Credit
• §3.21 Open or General Credit
• §3.22 Partial Performance Credit
• §3.23 Performance-Based Standby Letter of Credit
• §3.24 Postoperative Credit
• §3.25 Preadvised Credit
• §3.26 Preoperative Credit
• §3.27 Red Clause or Anticipatory Credit
• §3.28 Reimbursement Credit
• §3.29 Revocable Credit
• §3.30 Revolving Credit
• §3.31 Sight or Payment Credit
• §3.32 Silent Confirmation
• §3.33 Simple Credit
• §3.34 Straight Credit
• §3.35 Teletransmission Credit
• §3.36 Third-Party Credits
• §3.37 Transferable Credit
• §3.38 Two-Party Credit
• §3.39 Usance Credit

Chapter 4. Article 5 of The Uniform Commercial Code

• §4.01 UCC: Introduction
• §4.02 UCC: Fundamentals of a Letter of Credit
• §4.03 UCC: Adviser's Obligations, §5-107(c)
• §4.04 UCC: Issuer's Obligations, §5-108
• §4.05 UCC: Confirmer's Obligations, §5-107(a)
• §4.06 UCC: Nominated Person's Obligations
• §4.07 UCC: Disclaimers of Obligations, §§5-103(c)and 5-111(e)
• §4.08 UCC: Beneficiary's Warranties, §5-110(1)
• §4.09UCC: Fraud and Prehonor Relief from Fraud, §5-109
• §4.10 UCC: Posthonor Litigation
• §4.11 The Intersection of UCC Article 5 and UCC Article 9

Chapter 5. Uniform Customs and Practice for Documentary Credits (UCP 500)

• §5.01 UCP: What It Is and How It Applies; Article 1
• §5.02 UCP: Fundamentals; Articles 2–6
• §5.03 UCP: Notifications; Articles 7–12
• §5.04 UCP: Examination of Documents; Article 13—Standards for Examination of Documents
• §5.05 UCP: Notice of Dishonor; Article 14—Discrepant Documents and Notice
• §5.06 UCP: Examination Notice and Preclusion: UCP 500 vis-à-vis UCC Article 5 and the New ISP
• §5.07 UCP: Disclaimers; Articles 15–19
• §5.08 UCP: Documents; Articles 20–22
• §5.09 UCP: Expiry; Articles 42–45
• §5.10 UCP: Transferable Credit; Article 48
• §5.11 UCP: Assignment of Proceeds; Article 49
• §5.13 International Standard Banking Practice (ISBP)
• §5.14 ICC Rules for Bank-to-Bank Reimbursements

Chapter 5A. UCP 600

• §5A.01 UCP 600
• §5A.02 UCP 600, General Provisions and Definitions, Articles 1–6
• §5A.03 Bank Undertakings and Notifications, Articles 7–16
• §5A.04 Original Documents, Article 17
• §5A.05 Extension of Expiry Last Date or Last Day for Presentation, Article 29
• §5A.06 Tolerance in Credit Amount, Quantity, and Unit Prices, Article 30
• §5A.07 Partial Drawings or Shipments, Article 31
• §5A.08 Installment Drawings or Shipments, Article 32
• §5A.09 Hours of Presentation, Article 33
• §5A.10 Disclaimer on Effectiveness of Documents, Article 34
• §5A.11 Disclaimer on Transmission and Translation, Article 35
• §5A.12 Force Majeure, Article 36
• §5A.13 Disclaimer for Acts of an Instructed Party, Article 37
• §5A.14 Transferable Credits, Article 38
• §5A.15 Assignment of Proceeds, Article 39

Chapter 6. The International Standby Practices 1998 (ISP98)

• §6.01 Introduction
• §6.02 Rule 1, General Provisions
• §6.03 Rule 2, Obligations
• §6.04 Rule 3, Presentation
• §6.05 Rule 4, Examination
• §6.06 Rule 5, Notice, Preclusion, and Disposition of Documents
• §6.07 Rule 6, Transfer, Assignment, and Transfer by Operation of Law
• §6.08 Rules 7 through 10, Miscellaneous Provisions
• §6.09 Standby User Checklist for ISP98
• §6.10 Conclusion

Chapter 7. Rules and Governmental Actions

• §7.01 Introduction
• §7.02 Legal Proceedings and Principles
• §7.03 Governmental Actions
• §7.04 UNCITRAL, URDG, and Other Rules
• §7.05 Arbitration and Letters of Credit

Chapter 8. Fraud and Injunctions

• §8.01 Overview
• §8.02 Old Colony Trust and Sztejn Cases
• §8.03 OldUCC Article5 Ambiguities
• §8.04 RevisedUCC Article 5 and Fraud
• §8.05 Illegality—Enron and the Mahonia Case

Chapter 9. Insolvency

• §9.01 Introduction
• §9.02 Terminology
• §9.03 Pertinent Provisions of the Bankruptcy Code
• §9.04 Letters of Credit and Bankruptcy
• §9.05 Letters of Credit: State Insolvency; Status of Foreign Insolvency Proceedings in U.S. Bankruptcy Court
• §9.06 Conclusion

Chapter 10. Subrogation, Setoff, and Marshaling

• §10.01 What Is Subrogation?
• §10.02 Subrogation and Letters of Credit: Examples Before Revised UCC Article 5
• §10.03 Subrogation Under UCC Revised Article 5
• §10.04 Subrogation and Letters of Credit: Bankruptcy Code
• §10.05 Setoff Under the Bankruptcy Code
• §10.06 Doctrine of Marshaling

Chapter 11. Basic Mechanics

• §11.01 The Players
• §11.02 How Letters of Credit Are Issued
• §11.03 Applicant; Examples
• §11.04 Issuer; Examples
• §11.05 Confirming Bank; Examples
• §11.06 Advising Bank; Examples
• §11.07 Nominated Bank; Examples
• §11.08 Beneficiary; Examples
• §11.09 Amending a Letter of Credit
• §11.10 How to Present for Payment
• §11.11 Expiry; Examples
• §11.12 Fees
• §11.13 Transmission of Data and Money
• §11.14 Electronic Issuance and Presentation
• §11.15 Internal Controls

Chapter 12. Reimbursement Agreements Annotated

• §12.01 Reimbursement Agreements
• §12.02 Examination of Documents: Bifurcated Standard
• §12.03 Waiving Liability of Issuer, Revised UCC Article §5-103(c)
• §12.04 Reimbursement Provisions
• §12.05 Choice of Rules—UCP or ISP? Exclusions to ISP Rules
• §12.06 Introduction to Annotated Forms
• §12.07 Commercial LOC Reimbursement and Security Agreement, with Annotations
• §12.08 Commercial LOC Application and Reimbursement Agreement, with Annotations
• §12.09 Reimbursement Agreement for Standby LOC Subject to the ISP
• §12.10 Unsecured Continuing Standby LOC Reimbursement Agreement: Good Example

Chapter 13. Standby Letters of Credit: Anatomy of Sample Forms

• §13.01 Using Chapters 13 and 14 Together
• §13.02 Clean LOC, Not an LOC, Standby LOC: Comparisons
• §13.03 Standby LOC: Application Form
• §13.04 Exclusions from UCP 500 and ISP98
• §13.05 Basic Form: Standby LOC
• §13.06 Extend Expiry or Pay for Evergreen Contracts
• §13.07 Standby LOC Form: Separately Confirmed Credit
• §13.08 Standby LOC Form: Amendment
• §13.09 Draft or Demand for Payment
• §13.10 Standby LOC Presentation Documents
• §13.11 Transfer Request for Standby LOC
• §13.12 Standby LOC Form: Assignment of Proceeds
• §13.13 Standby LOC Form: Release of Credit or Reduction of Amounts Available
• §13.14 Standby LOC Form: ForceMajeure Extending Expiry
• §13.15 Examples of Standby Credit Forms

Chapter 14. Standby Letters of Credit: Language and Procedures

• §14.01 Reconciling Contracts with Credits
• §14.02 Contract for Sale to Be Secured by Standby Letter of Credit
• §14.03 Issuer's Engagement to Pay
• §14.04 Nondocumentary, Extrinsic Conditions
• §14.05 Discrepancies: Standby LOC Examples
• §14.06 Use of the Word “Purported”
• §14.07 Drafts and Payment Demands
• §14.08 Statements of Nonperformance and Other Documents

Chapter 15. Illustrative Transactions

• §15.01 Illustrative Transactions: In General
• §15.02 Accounts Payable
• §15.03 Appeal and Supersedeas Bonds
• §15.04 Arbitration: Security for Award
• §15.05 Bid, Performance, and Advance Payment Security
• §15.06 Credit Rating Enhancement of Debt Securities
• §15.07 Installment Payments and Sales
• §15.08 Lease Rentals; Sale and Leaseback
• §15.09 Limited Partnerships, Installment Contributions
• §15.10 Loan Collateral
• §15.11 Oil Industry
• §15.12 Postcontract Addition of Security; Form
• §15.13 Promissory Notes
• §15.14 Reinsurance
• §15.15 Trade Accounts Receivable
• §15.16 United States Government Contracts and Transactions
• §15.17 State Contracts and Transactions
• §15.18 Real Estate Transactions
• §15.19 International Crisis Resolution Using a Standby LOC
• §15.20 Miscellaneous Uses of Standby Letters of Credit

Chapter 16. Forms, Procedures, and Checklists

• §16.01 Using Chapters 16 and 17 Together
• §16.02 ICC Standard Documentary Credit Forms
• §16.03 Commercial LOC Application Form
• §16.04 Basic Form: Commercial LOC
• §16.05 Commercial Letters of Credit in Action
• §16.06 Discrepant Documents and Waivers
• §16.07 Transfers, with Forms
• §16.08 Assignment of Proceeds: Form
• §16.09 Applicant's Checklist for LOCs
• §16.10 Beneficiary'sChecklist for LOCs
• §16.11 Administrative Procedures

Chapter 17. Commercial Letters of Credit: Presentation Documents

• §17.01 Introduction: Purposes and Scope of Chapter
• §17.02 Transport Documents: Definitions
• §17.03 UCP Transport Documents
• §17.04 UCP: Insurance Documents
• §17.05 UCP: Commercial Invoices and Other Documents; Articles 37–38
• §17.06 UCP 500: Allowances, Partial and Installment Shipments/Drawings; Articles 39–41
• §17.07 UCP 500's Words of Art: Articles 39, 46–47
• §17.08 UCC Article 7: Bills of Lading Provisions
• §17.09 Presentation Documents: Cases Illustrating Deficiencies

Chapter 18. Paying the Beneficiary: The Fundamental Principles of Letter of Credit Transactions

• §18.01 Paying the Beneficiary
• §18.02 Strict Compliance
• §18.03 Timely Presentation
• §18.04 Measuring Compliance
• §18.05 The Preclusion Rule
• §18.06 The Independence Principle
• §18.07 Fraud
• §18.08 Warranties and Other Postpayment Rights and Obligations
• §18.09 Conclusion

Table of Cases

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Understanding Back-To-Back Letters of Credit Laundering Risks

Bachir El Nakib, Senior Consultant, Compliance Alert (LLC)

Letter of Credit

A credit instrument issued by a bank that guarantees payments on behalf of its customer to a third party when certain conditions are met. Letters of Credit (L/Cs) are commonly used to finance exports. Exporters want assurance that the ultimate buyer of its goods will make payment, and this is given by the buyer’s purchase of a bank letter of credit. The L/C is then forwarded to a correspondent bank in the city in which the payment is to be made. The L/C is drawn on when the goods are loaded for shipping, received at the importation point, clear customs and are delivered. L/Cs can be used to facilitate money laundering by transferring money from a country with lax exchange controls, thus assisting in creating the illusion that an import transaction is involved. L/Cs can also serve as a façade when laundering money through the manipulation of import and export prices. Another laundering use for L/Cs is in conjunction with wire transfers to bolster the legitimate appearance of non- existent trade transactions.  

Purpose The purpose is to provide a general understanding of letters of credit, their use and application. The topics covered are the following:

• General background information;
• Types of letters of credit;
• Common problems with letters of credit;
• Procedures for establishing letters of credit;
• Amendments; and
• General tips to both buyers and sellers.

In addition, attachments to this document detail a step-by-step letter of credit procedures.

Definition Letters of credit are commonly used to reduce credit risk to sellers in both domestic and international sales arrangements. By having a bank issue a letter of credit, in essence, one is substituting the bank's credit worthiness for that of the customer.  

Types:  There are two basic forms of letters of credit:  

-   Standby L/C, and 

-  Documentary L/C,

Documentary letters of credit can be either Revocable or Irrevocable, although the first is extremely rare. Irrevocable letters of credit can be Confirmed or Not Confirmed. Each type of credit has advantages and disadvantages for the buyer and for the seller, which this information will review below. Charges for each type will also vary. However, the more the banks assume risk by guaranteeing payment, the more they will charge for providing the service.  

Documentary Revocable Letter of Credit Revocable credits may be modified or even canceled by the buyer without notice to the seller. Therefore, they are generally unacceptable to the seller.  

Documentary Irrevocable Letter of Credit This is the most common form of credit used in international trade. Irrevocable credits may not be modified or canceled by the buyer. The buyer's issuing bank must follow through with payment to the seller so long as the seller complies with the conditions listed in the letter of credit. Changes in the credit must be approved by both the buyer and the seller. If the documentary letter of credit does not mention whether it is revocable or irrevocable, it automatically defaults to irrevocable. See Credit Administration, Sample Procedure for Administration of a Documentary Irrevocable Letters of Credit for a systematic procedure for establishing an irrevocable letter of credit.

There are two forms of irrevocable credits:

Unconfirmed credit  (the irrevocable credit not confirmed by the advising bank) In an unconfirmed credit, the buyer's bank issuing the credit is the only party responsible for payment to the seller. The seller's advising bank pays only after receiving payment from the issuing bank. The seller's advising bank merely acts on behalf of the issuing bank and, therefore, incurs no risk.  

Confirmed credit  (the irrevocable confirmed credit) In a confirmed credit, the advising bank adds its guarantee to pay the seller to that of the buyer's issuing bank. Once the advising bank reviews and confirms that all documentary requirements are met, it will pay the seller. The advising bank will then look to the issuing bank for payment. Confirmed Irrevocable letters of credit are used when trading in a high-risk area where war or social, political, or financial instability are real threats. Also common when the seller is unfamiliar with the bank issuing the letter of credit or when the seller needs to use the confirmed letter of credit to obtain financing its bank to fill the order. A confirmed credit is more expensive because the bank has added liability.  

Standby Letter of Credit This credit is a payment or performance guarantee used primarily in the United States. They are often called non-performing letters of credit because they are only used as a backup should the buyer fail to pay as agreed. Thus, a stand-by letter of credit allows the customer to establish a rapport with the seller by showing that it can fulfill its payment commitments. Standby letters of credit are used, for example, to guarantee repayment of loans, to ensure fulfillment of a contract, and to secure payment for goods delivered by third parties. The beneficiary to a standby letter of credit can cash it on demand. Stand-by letters of credit are generally less complicated and involve far less documentation requirements than irrevocable letters of credit. See Credit Administration, Sample Procedure for Administration of a Standby Letter of Credit for a systematic procedure for establishing a standby letter of credit.  

Special Letters of Credit The following is a brief description of some special letters of credit.  

Back-to-Back Letter of Credit This is a new letter of credit opened based on an already existing, non-transferable credit used as collateral. Traders often use back-to-back arrangements to pay the ultimate supplier. A trader receives a letter of credit from the buyer and then opens another letter of credit in favor of the supplier. The first letter of credit serves as collateral for the second credit.  

The first letter of credit would constitute the collateral for the second letter of credit. This arrangement is often called a back-to-back letter of credit, which is also sometimes called primary and secondary letters of credit, a mother and baby letter of credit, or a master and secondary letter of credit.  

Deferred Payment (Usance) Letter of Credit In Deferred Payment Letters of Credit, the buyer accepts the documents related to the letter of credit and agrees to pay the issuing bank after a fixed period. This credit gives the buyer a grace period for payment.  

Red Clause Letter of Credit Red Clause Letters of Credit provide the seller with cash prior to shipment to finance production of the goods. The buyer's issuing bank may advance some or all of the funds. The buyer, in essence, extends financing to the seller and incurs the risk for all advanced credits.  

Revolving Letter of Credit With a Revolving Letter of Credit, the issuing bank restores the credit to its original amount once it has been used or drawn down. Usually, these arrangements limit the number of times the buyer may draw down its line over a predetermined period.  

Transferable Letter of Credit This type of credit allows the seller to transfer all or part of the proceeds of the original letter of credit to a second beneficiary, usually the ultimate supplier of the goods. The letter of credit must clearly state that it is transferable for its to be considered as such. This is a common financing tactic for middlemen and is common in MENA region and East Asia.  

Assignment of Proceeds The beneficiary of a letter of credit may assign all or part of the proceeds under a credit to a third party (the assignee). However, unlike a transferred credit, the beneficiary maintains sole rights to the credit and is solely responsible for complying with its terms and conditions. For the assignee, an assignment only means that the paying bank, once it receives notice of the assignment, undertakes to follow the assignment instructions, if and when payment is made. The assignee is dependent upon the beneficiary for compliance, and thus this arrangement is riskier than a transferred credit. Before agreeing to an assignment of proceeds arrangement, the assignee should carefully review the original letter of credit.  

Common Problems with Letters of Credit Most problems result from the seller's inability to fulfil obligations stated in the letter of credit. The seller may find these terms difficult or impossible to fulfill and, either tries to fulfil them and fails, or asks the buyer to amend to the letter of credit. As most letters of credit are irrevocable, amendments may at times be difficult since both the buyer and the seller must agree.

Sellers may have one or more of the following problems:  

• The shipment schedule cannot be met;
• The stipulations concerning freight costs are unacceptable;
• The price becomes too low due to exchange rates fluctuations;
• The quantity of product ordered is not the expected amount;
• The description of product is either insufficient or too detailed; and,
• The stipulated documents are difficult or impossible to obtain.  

Even when sellers accept the terms of a letter of credit, problems often arise late in the process. When this occurs, the buyer's and seller's banks will try to negotiate any differences. In some cases, the seller can correct the documents and present them within the time specified in the letter of credit. If the documents cannot be corrected, the advising bank will ask the issuing bank to accept the documents despite the discrepancies found. It is important to note that, if the documents are not in accord with the specifications of the letter of credit, the buyer's issuing bank is no longer obligated to pay.

Basic Procedures for Establishing a Letter of Credit

The letter of credit process has been standardized by a set of rules published by the International Chamber of Commerce (ICC). These rules are called the Uniform Customs and Practice for Documentary Credits (UCP) and are contained in ICC Publication No. 600. The following is the basic set of steps used in a letter of credit transaction. Specific letter of credit transactions follow somewhat different procedures.

1. After the buyer and seller agree on the terms of a sale, the buyer arranges for his bank to open a letter of credit in favor of the seller. Note: The buyer will need to have a line of credit established at the bank or provide cash collateral for the amount of the letter of credit.

2. The buyer's issuing bank prepares the letter of credit, including all of the buyer's instructions to the seller concerning shipment and required documentation.

3. The buyer's bank sends the letter of credit to the seller's advising bank.

4. The seller's advising bank forwards the letter of credit to the seller.

5. The seller carefully reviews all conditions stipulated in the letter of credit. If the seller cannot comply with any of the provisions, it will ask the buyer to amend the letter of credit.

6. After final terms are agreed upon, the seller ships the goods to the appropriate port or location.

7. After shipping the goods, the seller obtains the required documents. Please note that the seller may have to obtain some documents prior to shipment.

8. The seller presents the documents to its advising bank along with a draft for payment.

9. The seller's advising bank reviews the documents. If they are in order, it will forward them to the buyer's issuing bank. If a confirmed letter of credit, the advising bank will pay the seller (cash or a bankers' acceptance).

10. Once the buyer's issuing bank receives and reviews the documents, it either (1) pays if there are no discrepancies; or (2) forwards the documents to the buyer if there are discrepancies for its review and approval.

Opening a Letter of Credit Level of Detail

The wording in a letter of credit should be simple, but specific. The more detailed an L/C is, the more likely the seller will reject it as too difficult to fulfill. At the same time, the buyer will wish to define in detail what its is paying for.

Type of Credit Letters of credit used in trade are usually either irrevocable unconfirmed credits or irrevocable confirmed credits. In choosing which type to open both the seller and the buyer should consider the generally accepted payment processes in each country, the value and demand for the goods, and the reputation of the buyer and seller.

Documents In specifying required documents, it is very important to include those required for customs and those reflecting the agreement reached between the buyer and the seller. Required documents usually include the bill of lading, a commercial and/or consular invoice, the bill of exchange, the certificate of origin, and the insurance document. Other documents required may be an inspection certificate, copies of a cable sent to the buyer with shipping information, a confirmation from the shipping company of the state of its ship, and a confirmation from the forwarder that the goods are accompanied by a certificate of origin. Prices should be stated in the currency of the letter of credit and documents should in the same language as the letter of credit.

The Letter of Credit Application The following information should be addressed when establishing a letter of credit.

1. Beneficiary The seller should provide to the buyer its full corporate name and correct address. A simple mistake here may translate to inconsistent or improper documentation at the other end.

2 . Amount The seller should state the actual amount of the letter of credit. One can request a maximum amount when there is doubt as to the actual count or quantity of the goods. Another option is to use words like "approximate", "circa", or "about" to indicate an acceptable 10 % plus or minus from the stated amount. For consistency, if you use this wording you will need to use it also in connection with the quantity.

3. Validity The seller will need time to ship and to prepare all the necessary documents. Therefore, the seller should ensure that the validity and period for document presentation after the shipment of the goods is long enough.

4. Seller's Bank The seller should list its advising bank as well as a reimbursing bank if applicable. The reimbursing bank is the local bank appointed by the issuing bank as the disbursing bank.

5. Type of Payment Availability The buyer and seller may agree to use sight drafts, time drafts, or some sort of deferred payment mechanism.

6. Desired Documents The buyer specifies the necessary documents. Buyers can list, for example, a bill of lading, a commercial invoice, a certificate of origin, certificates of analysis, etc. The seller must agree to all documentary requirements or suggest an amendment to the letter of credit.

7. Notify Address This is the address to notify upon the imminent arrival of goods at the port or airport of destination. A notification listing damaged goods is also sent to this address, if applicable.

8 . Description of Goods The seller should provide a short and precise description of the goods as well as the quantity involved. Note the comments in step #2 above concerning approximate amounts.

9. Confirmation Order With international arrangements, the seller may wish to confirm the letter of credit with a bank in its country.

  Amendment of a Letter of Credit For the seller to change the terms noted on an irrevocable letter of credit, it must request an amendment from the buyer.

The amendment process is as follows:

• The seller requests a modification or amendment of questionable terms in the letter of credit;  
• If the buyer and issuing bank agree to the changes, the issuing bank will change the letter of credit;  
• The buyer's issuing bank notifies the seller's advising bank of the amendment; and
• The seller's advising bank notifies the seller of the amendment.

Tips for Buyers and Sellers  

1. Before signing a sales contract, the seller should make inquiries about the buyer's creditworthiness and business practices. The seller's bank will generally assist in this investigation.

2. In many cases, the issuing bank will specify the advising and/or confirming bank. These designations are usually based on the issuing bank's established correspondent relationships. The seller should ensure that the advising/confirming bank is a financially sound institution.

3. The seller should confirm the good standing of the buyer's issuing bank if the letter of credit is unconfirmed.

4. For confirmed letters of credit, the seller's advising bank should be willing to confirm the letter of credit issued by the buyer's bank. If the advising bank refuses to do so, the seller should request another issuing bank as the current bank may be or is in the process of becoming insolvent.

5. The seller should carefully review the letter of credit to ensure its conditions can be met. All documents must conform to the terms of the letter of credit. The seller must comply with every detail of the letter of credit specifications; otherwise the security given by the credit is lost.

6. The seller should ensure that the letter of credit is irrevocable.

7. If amendments are necessary, the seller should contact the buyer immediately so that the buyer can instruct the issuing bank to make the necessary changes quickly. The seller should keep the letter of credit's expiration date in mind throughout the amendment process.

8. The seller should confirm with the insurance company that it can provide the coverage specified in the letter of credit and that insurance charges listed in the letter of credit are correct. Typical insurance coverage is for CIF (cost, insurance and freight) often the value of the goods plus about 10 percent.

9. The seller must ensure that the goods match the description in the letter of credit and the invoice description.

10. The seller should be familiar with foreign exchange limitations in the buyer's country that could hinder payment procedures.  

1. When choosing the type of letter of credit, the buyer should consider the standard payment methods in the seller's country.

2. The buyer should keep the details of the purchase short and concise.

3. The buyer should be prepared to amend or re-negotiate terms of the letter of credit with the seller. This is a common procedure in international trade. With irrevocable letters of credit, the most common type, all parties must agree to amend the document.

4. The buyer can reduce the foreign exchange risk by buying forward currency contracts.

5. The buyer should use a bank experienced in foreign trade as its issuing bank.

6. The validation time stated on the letter of credit should give the seller ample time to produce the goods or to pull them out of stock.

7. A letter of credit is not fail-safe. Banks are only responsible for the documents exchanged and not the goods shipped. Documents in conformity with the letter of credit specifications cannot be rejected on grounds that the goods were not delivered as specified in the contract. The goods shipped may not in fact be the goods ordered and paid for.

8. Purchase contracts and other agreements pertaining to the sale between the buyer and seller are not the concern of the issuing bank. Only the letter of credit terms are binding on the bank.

9. Documents specified in the letter of credit should include those the buyer requires for customs clearance.

After receiving the irrevocable L/C , Sometimes exporters of services and goods, request for opening one or more back to back L/Cs . In such negotiation two separate L/C are used and using of it is necessary when the main beneficiary is not able to provide goods and for many other reasons , namely , first beneficiary is not willing to disclose the name of his buyer to the second beneficiary, beneficiary does not accept to transfer the L/C due to the high risk, the main L/C currency differs with the currency of buying the goods by the first beneficiary from the producer ( second beneficiary), first beneficiary intends to purchase from second beneficiary in a price lower than the first L/C amount and to sell for first L/C price to the first L/C buyer. In such cases it is necessary to use back to back L/Cs. So, in order to issue back to back L/C, first beneficiary requests for issuing the second L/C.   Conditions and important notes which are considered and observed in the time of second L/C opening are as follows :  

1) Second L/C opening is the subject which is only related to beneficiary and second L/C issuing bank and it is not necessary that the issuing bank of first L/C or first applicant be aware or agree with the case.

2) Maximum FX amount limit and second L/C currency will be upto 90 percent of first L/C amount .

3) First L/C and back to back L/C conditions such as goods and required documents and …must suit each other.

4) Expiry date of back to back L/C must be at least 15 days prior to first L/C expiry date and at most one week after the latest  shipment date.  

5) After issuing the second L/C , the bank may only accept those amendments of the first L/C of the issuing bank’s Correspondent which are relevant to conditions of both L/Cs and the request for full cancellation of the first L/C is subject to the full cancellation of the second L/C and agreement of the Second beneficiary within the validity of the L/C.

6) Opening  back to back L/C is done taking into consideration the client's credit worthiness ( beneficiary of the first L/C ) , obtaining enough security and carrying out the required processes in the relevant Credit Commission in accordance with the specified ceilings and Uniform Customs and Practice For Documentary Letters of Credit against ‘mosharekat-e-madani’ contract in FX currency.

7) In case back to back L/C is used for import of the goods from outside of the country or Free Zones , implementation of all processes of order registration , obtaining relevant licenses and observation of the circulars relevant to the import of the goods are obligatory . Processes of Back to Back LC: 1- Receipt of the Export L/C for which BSI is advising and negotiating bank . 2- Review of the issuing bank's credit worthiness. 3- Advising  the L/C to the first beneficiary . 4- Receipt of the first beneficiary's request for issuing the back to back L/C based on the Export L/C. 5- Obtaining the authorization from Export Section of FX Operations Department for issuance of the back to back LC. 6- Implementation of L/C issuing processes such as obtaining Credit Commission's approval relevant to the specified ceilings complying with Uniform Customs and Practice for Documentary Letters of credit and filling in the form No 508 , undertaking form and other documents related to the letter of credit. 7- Receipt of the specified advance payment and other charges from the applicant . 8- Issuing the back to back L/C.

Trigger Events   There may be trigger events during the onboarding stage or during the ongoing review of a relationship or during the transaction process if any additional risk factors become apparent, and this may warrant additional or enhanced due diligence which may include third parties (i.e., parties not associated with Bank  A , intermediaries or traders using  back-to-back or transferable  DCs to unconnected other parties). Bank B due diligence

• A  should undertake appropriate due diligence on B, depending on the nature of the relationship between  A  and  B .  
• The due diligence will support a continuing relationship with  B , which will be subject to a relevant risk-based review cycle.  

Reviewing transactional information Reviewing and screening will take place at:

• receipt of the initial D/C application (and any amendments) from  X ;  
• receipt and checking of documents presented by  Y  through  B ;  
• payment;  
• other times where material changes to the transaction occur.

In practice, once a D/C has been issued, A has an obligation to complete the transaction. Only if subsequent reviewing activity shows a positive screening match would Bank  A  be in a position to stop the transaction.  Fraud and D/Cs Depending on local law there may be circumstances where fraud would also allow the transaction to be stopped. The documentation presented to Bank  A  will be examined to ensure compliance with the DC and in accordance with the ICC UCP 600 and international banking standards.  Reviewing the application This includes  sanctions  and  terrorist lists  for:

• Y  as a named target;  
• Y's  country;  
• the goods;  
• the shipment country;  
• transshipment points and destination points;  
• all other names in the D/C;  
• the countries which are rated as high-risk for other reasons in which  B  or  Y  are located or the transportation of goods occurs.

Case Study: ING Bank, N.V.  

A Settlement Agreement was released in June 2012 by the United States Department of the Treasury regarding the voluntary self-disclosure to the  Office of Foreign Assets Control  (OFAC) by ING Bank, N.V. (ING Bank), a financial institution registered and organized in the Netherlands. The violations of numerous sanctions programs imposed by the United States against Cuba, Burma, the Sudan, Libya and Iran were determined by the Americans as “egregious.” The total settlement by ING Bank to resolve this matter with the United States is $619,000,000.00, an amount equivalent to 8.5 percent of ING Bank’s  net profits  in fiscal 2011 or the price of a 32-year stay at Richard Branson’s private 74-acre luxury Caribbean retreat  on Necker Island (at $371,000/week, plus tips).  

The bank pledged major changes in the conduct of its business in the areas of policies, software, training and compliance programs, as well as closing offices in certain countries. Although the total cost of such actions has not been made public, it is safe to assume it was an expensive exercise, adding further to the $0.6 billion ING Bank paid to the American government. The total cost of this remarkable failure in correspondent banking and trade-finance risk management will never be known to outsiders.

According to a report from Thomson Reuters, an ING spokesperson stated that “disciplinary actions including terminations and forced early retirement against more than 60 employees” had been undertaken by the bank. American authorities, however, have not yet made public any intentions on prosecuting individual bank employees.  

To many market observers, punishing shareholders by reducing profits rather than launching criminal prosecutions of bankers flagrantly violating the law makes a farce of regulatory oversight. Given the recent past and present economic climate, it is likely that this regulatory action will further inflame tempers and push ill-informed politicians into the fray — not the ideal solution to a complex problem.  

ING Bank’s expensive settlement was largely a result of “stripping,” the practice of removing or substituting information contained in payment or trade finance instructions in order to prevent association of the transaction with a sanctioned entity – person or corporation – or country.  

Payments in U.S. dollars (USD) for international banks operating outside the United States must be handled by a correspondent bank in the United States. Nostro and Vostro accounts are debited and credited based on transactional activity between banks based on the currencies involved and the underlying transactions, whether they are related to straightforward payments, international trade or portfolio investment flows.

In this case, the American government spent considerable time examining certain correspondent banking and international trade finance activity of ING Bank, namely:  

Settlement ghosting

ING Bank’s operation on the Caribbean island of Curacao would handle settlement instructions for USD payments on behalf of Cuban exporters, but it would not make reference to the Cuban beneficiary; instead, it would use an internal reference number identifiable only to ING Bank in Curacao. For outgoing SWIFT MT103 messages from ING Bank’s Cuban business, field 50 would be not include the name of the Cuban applicant but rather the name of the ING Bank branch handling the payment, or in some cases, the name of the branch itself. [Editor’s Note: A SWIFT payment involves the use of a highly-specialized and secure messaging service to an institution, either in the United States or overseas. It is an acronym for Society for Worldwide Interbank Financial Telecommunications.]

As a result, the payment applicant’s instructions would describe a USD payment, routed through ING Bank’s correspondent bank in the United States with no reference to a Cuban beneficiary, and therefore unlikely to trip automated warnings within the USD correspondent bank’s payments systems.  

SWIFT message shopping

ING Bank in Curacao would employ a SWIFT MT202 cover payment message instead of an MT103, as the MT202 would not need to include the originator nor beneficiary information, convenient for when Cuban entities are transacting in USD. SWIFT undoubtedly will be less than pleased finding out their rules were bent to bypass sanctions regulations. An international bank connected to SWIFT can run into significant reputational risk problems if its MT202 cover payments messages require enhanced due diligence by others.  

Corporate account nesting

When mitigating the risks of money laundering in correspondent banking activity, one must be careful to ensure one bank does not “nest” its transactional activity in another bank’s regular course of business. In the case of ING Wholesale Banking’s branch in the Netherlands, they nested transactional activity by Cuban companies sanctioned by the United States into corporate account activity by a non-sanctioned corporate entity. They even named this process the use of “a special purpose front office.”  

Back-to-unknown letter of credit

A back-to-back or transferable letter of credit is employed by a trading company to prevent the exporter from dealing directly with the importer and cutting out the middle man. In 2003, Bank Tejarat of Iran , the third largest bank in the country, issued a letter of credit for the purchase of an aircraft engine from a firm in the United States.  

ING Bank’s Romanian branch followed Bank Tejarat’s amendment instructions to scrub the transferable letter of credit of all information related to the Iranian importer and to change the final destination of the goods from Iran to Germany. Both banks knew that if the transaction contained information on the actual purchaser in Iran, the American side would run afoul of economic sanctions.

Judging from the information contained in the Settlement Agreement, it would appear that the advising bank in the United States flagged the transaction and contacted the second issuing bank, ING Bank’s Romanian branch, about further details on the first issuing bank (Bank Tejarat), the importer and final destination. Such flagging could have been an automatic trigger within the advising bank’s AML systems (perhaps due to perceived Romanian country risk levels) or the simple policy of requesting the details of the first transactional leg when processing the second leg of a back-to-back letter of credit.

When an employee of ING Bank’s Romanian branch informed the American advising bank that the first issuing bank was Bank Tejarat of Iran, the transaction was flagged and reported to OFAC.  

The techniques noted above all touch upon the techniques of money laundering within correspondent banking and trade-based money laundering, as the proceeds from country sanctions violations routed to the transaction’s beneficiary by mechanisms that disguise origins and lend a veneer of legitimacy to the transaction by financial professionals can be construed as money laundering.  

Using the above tactics to evade American law takes time, patience and a coordinated approach by an extensive network of people within a major international financial institution. If large elements of a bank’s sales, operations, risk management and legal counsel act in concert to subvert the country sanctions, the bank’s compliance culture is tragically flawed and prone to place shareholders, directors and unsuspecting employees at risk.  

To avoid settlement payments and enforcement agreements whose sum cost rise into the billion-dollar range, international banks must instil a compliance culture within their international trade sales and processing businesses, along with the same within the payments centre and the correspondent banking division.

http://blogs.reuters.com/financial-regulatory-forum/2012/07/16/learn-the-compliance-lessons-from-an-epic-fail-in-correspondent-banking-and-trade-finance/

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What Is a Standby Letter of Credit (SLOC), and How Does It Work?

What Is a Standby Letter of Credit (SLOC)?

A standby letter of credit (SLOC) is a legal document that guarantees a bank's commitment of payment to a seller in the event that the buyer—or the bank's client—defaults on the agreement. A standby letter of credit helps facilitate international trade between companies that don't know each other and have different laws and regulations. Although the buyer is certain to receive the goods and the seller is certain to receive payment, a SLOC doesn't guarantee the buyer will be happy with the goods. A standby letter of credit can also be abbreviated SBLC.

Key Takeaways

• A standby letter of credit (SLOC) reassures another party during a business transaction.
• The SLOC guarantees that a bank will financially back the buyer in the event that they can't complete their sales agreement.
• A SLOC can offer protection for the selling party in the event of a bankruptcy.

Investopedia / Laura Porter

How a Standby Letter of Credit Works

A SLOC is most often sought by a business to help it obtain a contract. The contract is a "standby" agreement because the bank will have to pay only in a worst-case scenario. Although an SBLC guarantees payment to a seller, the agreement must be followed exactly. For example, a delay in shipping or misspelling a company's name can lead to the bank refusing to make the payment.

There are two main types of standby letters of credit:

• A financial SLOC guarantees payment for goods or services as specified by an agreement. An oil refining company, for example, might arrange for such a letter to reassure a seller of crude oil that it can pay for a huge delivery of crude oil.
• The performance SLOC, which is less common, guarantees that the client will complete the project outlined in a contract. The bank agrees to reimburse the third party in the event that its client fails to complete the project.

The recipient of a standby letter of credit is assured that it is doing business with an individual or company that is capable of paying the bill or finishing the project.

The procedure for obtaining a SLOC is similar to an application for a loan . The bank issues it only after appraising the creditworthiness of the applicant.

In the worst-case scenario, if a company goes into bankruptcy or ceases operations, the bank issuing the SLOC will fulfill its client's obligations. The client pays a fee for each year that the letter is valid. Typically, the fee is 1% to 10% of the total obligation per year.

Advantages of a Stand by Letter of Credit

The SLOC is often seen in contracts involving international trade, which tend to involve a large commitment of money and have added risks.

For the business that is presented with a SLOC, the greatest advantage is the potential ease of getting out of that worst-case scenario. If an agreement calls for payment within 30 days of delivery and the payment is not made, the seller can present the SLOC to the buyer's bank for payment. Thus, the seller is guaranteed to be paid. Another advantage for the seller is that the SBLC reduces the risk of the production order being changed or canceled by the buyer.

An SBLC helps ensure that the buyer will receive the goods or service that's outlined in the document. For example, if a contract calls for the construction of a building and the builder fails to deliver, the client presents the SLOC to the bank to be made whole. Another advantage when involved in global trade, a buyer has an increased certainty that the goods will be delivered from the seller.

Also, small businesses can have difficulty competing against bigger and better-known rivals. An SBLC can add credibility to its bid for a project and can often times help avoid an upfront payment to the seller.

How Much Does a Standby Letter of Credit Cost?

Since a bank is taking a risk by offering a SBLC, there are fees to obtain one. Typically, banks will charge between 1% and 10% of the total guaranteed price for each year that the SBLC is active.

Where Can I Apply for a Standby Letter of Credit?

Standby letters of credit are typically offered by commercial banks and lenders. The bank will assess the creditworthiness of the applicant much like a loan application.

When Would You Need an SLBC?

Standby letters of credit are often used in international trade deals where the terms may be different between parties, but that is not the only use. Anytime a buyer needs to guarantee payment for goods or services, a SBLC may be in order.

A SBLC is a powerful tool for companies negotiating large deals for goods or services. With the backing of a commercial bank, an SBLC offers reassurance that an agreement will go through, even in a worst-case scenario. But a SBLC is not without cost—there are fees, and your creditworthiness will be assessed.

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U.C.C. - ARTICLE 5 - LETTERS OF CREDIT (1995)

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• § 5-101 . Short Title.
• § 5-102 . Definitions.
• § 5-103 . Scope.
• § 5-104 . Formal Requirements.
• § 5-105 . Consideration.
• § 5-106 . Issuance, Amendment, Cancellation, and Duration.
• § 5-107 . Confirmer, Nominated Person, and Adviser.
• § 5-108 . Issuer's Rights and Obligations
• § 5-109 . Fraud and Forgery.
• § 5-110 . Warranties.
• § 5-111 . Remedies.
• § 5-112 . Transfer of Letter of Credit.
• § 5-113 . Transfer by Operation of Law.
• § 5-114 . Assignment of Proceeds.
• § 5-115 . Statute of Limitations.
• § 5-116 . Choice of Law and Forum.
• § 5-117 . Subrogation of Issuer, Applicant, and Nominated Person.
• § 5-118 . Security Interest of Issuer or Nominated Person.
• TRANSITION PROVISIONS
• § 5-101. Short Title.
• § 5-102. Definitions.
• § 5-103. Scope.
• § 5-104. Formal Requirements.
• § 5-105. Consideration.
• § 5-106. Issuance, Amendment, Cancellation, and Duration.
• § 5-107. Confirmer, Nominated Person, and Adviser.
• § 5-108. Issuer's Rights and Obligations
• § 5-109. Fraud and Forgery.
• § 5-110. Warranties.
• § 5-111. Remedies.
• § 5-112. Transfer of Letter of Credit.
• § 5-113. Transfer by Operation of Law.
• § 5-114. Assignment of Proceeds.
• § 5-115. Statute of Limitations.
• § 5-116. Choice of Law and Forum.
• § 5-117. Subrogation of Issuer, Applicant, and Nominated Person.
• § 5-118. Security Interest of Issuer or Nominated Person.

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Standby Letters of Credit (SBLC / SLOC) – 2024 Jargon Buster [UPDATED]

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Letters of credit vs bank guarantees, what is a standby letter of credit (sblc / sloc).

A Standby Letter of Credit (SBLC / SLOC) is a guarantee that is made by a bank on behalf of a client, which ensures payment will be made even if their client cannot fulfill the payment. It is a payment of last resort from the bank, and ideally, is never meant to be used.

How can a contractual SBLC be used and how does it work?

An SBLC is frequently used as a safety mechanism for the beneficiary, in an attempt to hedge out risks associated with the trade. Simplistically, it is a guarantee of payment which will be issued by a bank on the behalf of a client. It is also perceived as a “payment of last resort” due to the circumstances under which it is called upon. The SBLC prevents contracts from going unfulfilled if a business declares bankruptcy or cannot otherwise meet financial obligations.

Furthermore, the presence of an SBLC is usually seen as a sign of good faith as it provides proof of the buyer’s credit quality and the ability to make payment. In order to set this up, a short underwriting duty is performed to ensure the credit quality of the party that is looking for a letter of credit. Once this has been performed, a notification is then sent to the bank of the party who requested the  Letter of Credit   (typically the seller).

In the case of a default, the counter-party may have part of the finance paid back by the issuing bank under an SBLC. Standby Letter of Credits are used to promote confidence in companies because of this.

How can you apply for a Standby Letter of Credit?

There are many aspects that a bank will take into consideration when applying for a Standby Letter of Credit, however, the main part will be whether the amount that is being guaranteed can be repaid. Essentially, it is an insurance mechanism to the company that is being contracted with.

As it is insurance, there may be collateral that is needed in order to protect the bank in a default scenario – this may be with cash or assets such as property. The level of collateral required by the bank and by the size of the SBLC will largely depend on the risk involved, and the strength of the business.

Other Application steps

There are other standard due diligence questions asked, as well as information requests regarding assets of the business and even possibly the owners. Upon receipt and review of the documentation, the bank will typically provide a letter to the business owner. Once the letter has been provided, a fee is then payable by the business owner for each yeah that the Standby Letter of Credit remains outstanding.

What are the fees for Standby Letters of Credit?

It is standard for a fee to be between 1-10% of the SBLC value. In the event that the business meets the contractual obligations prior to the due date, it is possible for an SBLC to be ended with no further charges.

What is the difference between SBLCs and LCs?

A Standby Letter of Credit is different from a Letter of Credit. An SBLC is paid when called on after conditions have not been fulfilled. However, a Letter of Credit is the guarantee of payment when certain specifications are met and documents received from the selling party.

Letters of credit promote trust in a transaction, due to the nature of international dealings, distance, knowledge of another party and legal differences.

How do SBLCs work in Cross-Border trade?

Where goods are sold to a counter-party in another country, they may have used an SBLC to ensure their seller will be paid. In the event that there is non-payment, the seller will present the SBLC to the buyer’s bank so that payment is received.

A performance SBLC makes sure that the criteria surrounding the trade such as suitability and quality of goods are met.

We sometimes see SBLCs in construction contracts as the build must fulfill many quality and time specifications. In the event that the contractor does not fulfill these specifications then there is no need to prove loss or have long protracted negotiations; the SBLC is provided to the bank and payment is then received.

Standby Letter of Credit: Frequently Asked Questions

Letters of credit are sometimes referred to as negotiable or transferrable. The issuing bank will pay a beneficiary or a bank that is nominated by the beneficiary. As the beneficiary has this power, they may ‘transfer’ or ‘assign’ the proceeds of a letter of credit to another company.

Yes – if it is a transferable letter of credit and it is a deferred instrument then this may be likely. This is so that the funder will provide the beneficiary with a discounted value just after the terms of the letter of credit have been fulfilled.

In order to issue a standby letter of credit, a bank will typically require a pledge of cash as collateral. There is a fee that is collected for this service, which is usually priced at a percentage of the letter of credit value.

The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits governs the way in which these instruments operate.

An SBLC will be paid in the event that the bank providing the instrument is still in operation and the beneficiary meets the criteria under the letter.

When there is genuine worry that the bank will not pay out, then a confirmed letter of credit may be used. This will be where a ‘stronger’ bank confirms the letter of credit.

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1 | Introduction to the Letter of Credit 2 | Types of Credit 3 | UCP 600 and the Letter of Credit 4 |  UCP 600 – Ultimate Guide 5 | Benefits of Letters of Credit 6 | Handling Document Discrepancies 7 | Restricted Letters of Credit 8 | Letters of Credit vs Bank Guarantees 9 | Standby Letters of Credit 10 | Sight Letters of Credit 11 | eUCP Explained 12 | URC 522 and eURC 13 | SWIFT Messaging Types 14 | Research 15 | BAFT & TFG Guide 16 | Parties Involved 17 | Letters of Credit Rules 18 | ISBP 821 19 | Financial Crime, Fraud and Sanctions 20 | Presentation of Documents 21 | Dispute Resolution 22 | Digitalisation and the Future

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About the Author

Deepesh Patel is Editorial Director at Trade Finance Global (TFG). In this role, Deepesh leads efforts in developing TFG’s brand, relationships and strategic direction in key markets, including the UK, US, Singapore, Dubai and Hong Kong.

Deepesh regularly chairs and speaks at international industry events with the WTO, BCR, Excred, TXF, The Economist and Reuters, as well as industry associations including ICC, FCI, ITFA, ICISA and BAFT.

Deepesh is the host of the ‘Trade Finance Talks’ podcast and ‘Trade Finance Talks TV’. He is co-author of ‘Blockchain for Trade: A Reality Check’ with the ICC and the WTO, alongside other industry research.

In addition to his work at TFG, Deepesh is a Strategic Advisor for WOA, and works closely with ITFA. He also sits on the Fintech Working Group of the Standardised Trust.

Prior to TFG, Deepesh worked at Travelex where he was responsible for the cards business and the Travelex Money app in Europe, NAM, UK and Brazil. Deepesh is Chair of Governors and co-opted LA Governor of the Wyvern Federation, which has responsibility for 5 primary schools in South London.

Letters of Credit/Types of Letters of Credit

• 1.1 Unconfirmed
• 1.2 Transferable Credit
• 1.3 Assignment of Proceeds
• 1.4 Revolving
• 1.5 Standby

Types of Letters of Credit [ edit | edit source ]

Unconfirmed [ edit | edit source ].

An unconfirmed irrevocable letter of credit provides a commitment by the issuing bank to pay, accept, or negotiate a letter of credit. An advising bank forwards the letter of credit to the beneficiary without responsibility or undertaking on its part except that it must use reasonable care to check the authenticity of the credit which it advised. It does not provide a commitment from the advising bank to pay, so the beneficiary is reliant upon the undertaking of the overseas bank. The beneficiary is not protected from the credit risk of the issuing bank nor the country risk.

Transferable Credit [ edit | edit source ]

Under a transferable letter of credit a beneficiary (the first beneficiary) can ask the issuing/advising/confirming bank to transfer the letter of credit in whole or in part to another party/ies such as supplier/s (second beneficiary/ies). A transferable letter of credit is usually used when the beneficiary is not the manufacturer/original supplier of some/all of the goods/services. This process enables the beneficiary to pay the manufacturer/original supplier by letter of credit. If the bank agrees, this bank, referred to as the transferring bank, advises the letter of credit to the second beneficiary/ies in the terms and conditions of the original letter of credit with certain constraints defined in Article 48 of UCP 500.

In general, unless the letter of credit states that it is transferable, it is considered non-transferable.

Assignment of Proceeds [ edit | edit source ]

The right to the proceeds of a letter of credit can sometimes be assigned where the beneficiary of a letter of credit is not the actual supplier of all or part of the letter of credit and wants the bank to pay the supplier out of funds received from the letter of credit. The beneficiary may choose this option if he or she

• does not want to request a transferable letter of credit from a buyer in order to keep the buyer from knowing who is the actual supplier of the goods.
• does not have the necessary credit with the bank to issue a new letter of credit to a supplier.

An assignment of proceeds takes the form of an irrevocable instruction from the beneficiary to the bank requesting that it pay the supplier out of the proceeds of the letter of credit which becomes due when documents are presented in compliance with the terms of the letter of credit.

Revolving [ edit | edit source ]

Although infrequently used today, revolving letters of credit were a tool created to allow companies conducting regular business to issue a letter of credit that could “roll-over” without the company having to reapply, thus enabling business flow to continue without interruption as long as the terms and conditions, quantities, and other transaction details did not change. In addition, if a letter of credit were a revolving one, there were few ways to stop it from rolling over; so, should a conflict arise between the parties while the letter of credit was in place or should the products change, there was little recourse for either party. In the business world today, the fact is that, unless required by law or because of high risk, on-going business is usually conducted without of letters of credit.

Standby [ edit | edit source ]

As is the case with the revolving letter of credit, standby letters of credit are infrequently used today. A standby letter of credit is one which is issued as a back-up or form of insurance for the seller should the buyer default on the agreed-upon payment terms. A standby letter of credit is issued in the same way a documentary credit is in that the collateral needed for issuance is required by the issuing bank and the beneficiary must comply with every detail as outlined in the letter of credit. The problem with this instrument is that the applicant has no guarantee, other than the seller’s word, that the standby will not be drawn against even if payment is made as agreed. This situation is challenging, especially if the letter of credit is confirmed and the advising bank sees only documents pertaining to the shipment as outlined in the letter of credit and has no knowledge of other payments being made.

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