Rupnarayan Bose[2]

The ICC Banking Commission’s Opinion to query [TA717rev2] was published in the January-March 2011 issue of the DC Insight. The Banking Commission in its ‘Analysis and conclusion’ stated that, “…A number of these do not reflect good banking practice ….It would not, therefore, be appropriate for ICC to offer any opinion as to whether the assumptions that have been made are correct when some of the examples do not reflect the expectation under the UCP…”. The fact is that these examples, irrespective of whether they reflect “good banking practice” or “the expectations under the UCP”, are well within the existing rules. Hence, in the opinion of this writer, the query deserved a more detailed response.

The reason why “a number of these [in the examples] do not reflect good banking practice” originates from the definition by SWIFT of MT700 Field 31D (Date and Place of Expiry) which states, “This field specifies the latest date for presentation under the documentary credit and the place where documents may be presented…”. The havoc that this particular definition has created is not only reflected in the query to the Banking Commission, but had also been discussed in two separate articles published in DC Insight and LC Monitor-Trade Services Update[3]. The Banking Commission Analysis itself admits that a credit “which contains an expiry in one place…and the availability with a bank located in another causes unnecessary, and often, unwarranted complications for the beneficiary…(emphasis added)”. Further, “For the nominated bank…this may seriously affect its ability to act under its nomination by honouring or negotiating.” Too true! The Analysis reaffirms that, “The basis for the UCP, in Article 6, ….is that the expiry place and place for availability are the same.” Therefore, it defies logic and common sense why no step has been taken to delete “and place” from the definition of Field 31D in MT 700, 705, 710, 720 and 740.

This article, a response to the Query, is a technical analysis within the framework of the current rules, suggesting possible alternatives to each of the examples in the Query.

Guidance note for expressions used in this analysis:

  • “Default option” means application of sub-articles 6(a) and 6(d)(ii) viz., “A credit available with a nominated bank is also available with the issuing bank; and, “A place for presentation other than that of the issuing bank is in addition to the place of the issuing bank.” A complying presentation to the issuing bank must be made before the expiry of the credit.
  • “Expiry” & “expiry date” mean the date of expiry stated in the credit or the period for presentation as determined by the date of shipment – whichever is earlier.
  • The term “KYC” refers to circumstances where a non-confirming bank receives documents for acceptance or for negotiation, from a party with which it has no established banking relationship whatsoever.
  • “Availability issue” refers to a situation where an LC expires in a country, city or place, but is not available with any bank in that country, city or place. Consequently, under the UCP, no bank there would be a ‘nominated bank’; no presentation – even for the sake of meeting the “expiry” deadline – would be a complying presentation, hence be protected under the UCP.
  • Strictly speaking, SWIFT Field 31D is for “date & place of expiry”. Where column 3 above states “LC expiry place” but names a bank viz., “Confirming Bank”, one has to assume that the LC is referring to Field 41A (“available with …by…”); the availability of the credit is thus restricted to that bank alone.

Eight examples out of a total of 23 are relatively less complicated. These are grouped together and analysed below:

Query Sl. No. Issuing bank location LC expiry place LC available with (i.e. nominated bank) Benef. location Analysis:
Documents to be presented to
1 London U.K. Issuing Bank Shanghai Issuing bank only
4 London Issuing Bank Issuing Bank Shanghai Issuing bank only
7 London U.K. Issuing Bank London Issuing bank only
9 London U.K. Bank B, London London Bank B or issuing bank (latter being the “default option”)
10 London Issuing Bank Issuing Bank London Only the issuing bank – with which the credit is available for negotiation and also for expiry.
15 London China Bank C, Shanghai Shanghai Bank C in China or the issuing bank (the “default option”)
18 London Bank C, Shanghai Bank C, Shanghai Shanghai Bank C or the issuing bank (the “default option”)
19 London Confirming Bank Confirming bank, Shanghai Shanghai Confirming bank in Shanghai or the issuing bank (the “default option”)

We now take up the more complicated examples. Analysis of options for the presentation of documents follows immediately after each example quoted from the original query.

  TABLE 2    
1 Query serial no. as per TA 717 : 8
2 Issuing bank location : London
3 LC expiry place : U.K.
4 LC available with (i.e. nominated bank) : Any bank
5 Beneficiary. location : London
6 Options for presentation of documents : Analysis as below:

Analysis:

  1. Option 1: LC is available with “any bank”; it is not restricted to a bank or place (viz., not only UK). Theoretically, therefore, the beneficiary may present documents to any bank, anywhere in the world, provided that bank presents the negotiated documents to any bank in UK (LC expires in UK) on or before the expiry of the LC. However, in practice, presentation just to any bank, anywhere will be hit by KYC issue.
  2. Option 2: Presenting to the issuing bank, which always remains the “default option”.
  3. Option 3: The beneficiary is in London. The LC is available with any bank (anywhere, including London). The beneficiary, in all likelihood, could be banking with bank(s) in London. So why not present to beneficiary’s bank in London?
  TABLE 3    
1 Query serial no. as per TA 717 : 22
2 Issuing bank location : London
3 LC expiry place : USA
4 LC available with (i.e. nominated bank) : Confirming bank, New York
5 Beneficiary. location : Shanghai
6 Options for presentation of documents : See below:

Analysis:

  • Option 1: Presentation may be made to the “confirming bank in NY or the issuing bank”.
  • Option 2: However, since the beneficiary is in Shanghai, and the “default option” is available, it makes better sense to send the documents direct to the issuing bank in London rather than to the confirming bank in New York, which anyway would be sending the same documents to the issuing bank in London.
  TABLE 4    
1 Query serial no. as per TA 717 : 14
2 Issuing bank location : London
3 LC expiry place : China
4 LC available with (i.e. nominated bank) : Any bank
5 Beneficiary. location : Shanghai
6 Options for presentation of documents : See analysis below:

Analysis:

  • Option 1: Theoretically, presentation could be made to any bank worldwide (no limitation stipulated). If the negotiating bank does not happen to be in China, after negotiation the documents must be delivered, before expiry, to any bank (LC is available with ‘any bank’) in China – the credit’s place of expiry. After negotiation, documents may be submitted to the issuing bank on any date thereafter. (However, why should any bank, anywhere, agree to negotiate – is a KYC issue and a potential problem area.)
  • Option 2: Simpler, and the sensible course, is to present documents to the beneficiary’s bank in China, where the LC is available both for negotiation and for expiry.
  • Option 3: Of course, the “default option” (a complying presentation direct to the issuing bank) is available, as always.
  TABLE 5    
1 Query serial no. as per TA 717 : 2
2 Issuing bank location : London
3 LC expiry place : U.K.
4 LC available with (i.e. nominated bank) : Any bank
5 Beneficiary. location : Shanghai
6 Options for presentation of documents : See analysis below:

Analysis:

  • Option 1: The credit is available with “any bank” (no restriction as to bank or place). Technically, therefore, documents could be negotiated by any bank worldwide, provided the bank thereafter delivers the documents to any bank in the UK (place of expiry) before expiry of the credit. The issue again is, why should any bank (located anywhere), not having confirmed the credit, and for reasons of “KYC”, simply agree to negotiate a presentation from a walk-in party?
  • Option 2: Beneficiary may present documents to his own bank in Shanghai for negotiation (LC available with any bank) well in time for that bank to deliver the negotiated documents to the issuing bank in London before the expiry of the credit. Exporter gets less time for presentation. (Alternately, the negotiating bank could try its luck with any other bank in the UK, where the credit expires. But it makes no practical sense, is not the best option, plus the KYC issue remains.)
  • Option 3: Present documents to any bank in the UK. (Since the beneficiary is based in Shanghai, the same “KYC issue” could pose problems in negotiation.)
  • Option 4: Through its own bank in Shanghai, beneficiary should present documents direct to the issuing bank (located at the place of expiry, is the “default option” – hence the best option here).
  TABLE 6    
1 Query serial no. as per TA 717 : 3
2 Issuing bank location : London
3 LC expiry place : U.K.
4 LC available with (i.e. nominated bank) : Bank A, Shanghai
5 Beneficiary. location : Shanghai
6 Options for presentation of documents : Analysis given below:

Analysis:

Note that the credit is available with only Bank A, Shanghai. Hence:

  • Option 1: Documents could be presented to Bank A, Shanghai (through the beneficiary’s bank, unless Bank A itself is the beneficiary’s banker). Bank A must deliver documents to any bank in the UK before the “expiry” of the credit (LC expires in the UK). The documents may reach the issuing bank any day thereafter. Unless Bank A has its own branch/correspondent in the UK, “KYC issue” may spoil the party. (This analysis is actually academic, more for the sake of technical analysis, to bring out the key issues. The more practical option is the one below.)
  • Option 2: Similar to Option 1 above, with the difference that Bank A should deliver documents direct to the issuing bank prior to the “expiry date” of the credit (LC expires in the UK, the issuing bank is also in the UK). This is a better option than the preceding one .
  • Option 3: The “default option” – direct presentation by beneficiary’s bank to the issuing bank prior to the credit’s expiry.
  TABLE 7    
1 Query serial no. as per TA 717 : 5
2 Issuing bank location : London
3 LC expiry place : Issuing Bank
4 LC available with (i.e. nominated bank) : Any bank
5 Beneficiary. location : Shanghai
6 Options for presentation of documents : See analysis below:

Analysis:

  • Option 1: A couple of countries had suggested presentation to the issuing bank as the preferred option. Availability with the issuing bank is always the default option. However, that is not the only option available to the beneficiary in this instance.
  • Option 2: Since the credit is available with any bank (column 4), with no particular bank nor place of its availability being stated, the credit is freely available for negotiation. Therefore, it makes eminent sense for the beneficiary to present documents to his own bank in Shanghai, China for negotiation. After negotiation, the negotiating bank must ensure that the documents are delivered to the issuing bank prior to the expiry of the credit. (This is the biggest constraint with such terms in a credit instrument.)
  TABLE 8    
1 Query serial no. as per TA 717 : 6
2 Issuing bank location : London
3 LC expiry place : Issuing Bank
4 LC available with (i.e. nominated bank) : Bank A, Shanghai
5 Beneficiary. location : Shanghai
6 Options for presentation of documents : See analysis next:

Analysis:

  • Option 1: Availability with the issuing bank is always the default option. However, that is not the only option available to the beneficiary.
  • Option 2: (The better option) Since the credit is available with Bank A, Shanghai (column 4), the beneficiary may present documents to Bank A (beneficiary’s banker?) in Shanghai, China for negotiation. After negotiation, Bank A must ensure that the documents are delivered only to the issuing bank before the expiry of the credit.
  TABLE 9    
1 Query serial no. as per TA 717 : 12
2 Issuing bank location : London
3 LC expiry place : Issuing Bank
4 LC available with (i.e. nominated bank) : Bank B, London
5 Beneficiary. location : London
6 Options for presentation of documents : See below:

Analysis:

  • Facts: The beneficiary is in London; the nominated bank (Bank B) with which the credit is restricted, is located in London, as is the issuing bank. The credit also expires in London. (One could assume that Bank B is the beneficiary’s banker, but that is no matter.)
  • Option 1: Since the credit is available with Bank B, London, the beneficiary may present documents to Bank B for negotiation. After negotiation, Bank B must ensure that the documents are delivered to the issuing bank in London prior to the expiry of the credit. (Note that the credit is set to expire only at the counter of the issuing bank. The place of expiry is irrelevant here.)
  • Option 2: Even though the credit is restricted to Bank B, the default option – irrespective of any other place of expiry, if stated in the credit – is always available to the beneficiary.
  TABLE 10    
1 Query serial no. as per TA 717 : 13
2 Issuing bank location : London
3 LC expiry place : China
4 LC available with (i.e. nominated bank) : Issuing Bank
5 Beneficiary. location : Shanghai
6 Options for presentation of documents : See analysis below:

Analysis:

  • The credit expires in China, but is not available in China. It is available only with the issuing bank which, incidentally, is in London. Hence, no bank in China (or any bank anywhere else in the world) can act as a nominated bank or negotiate documents.
  • The only option available to the beneficiary is to present documents to the issuing bank. Incidentally, it makes no sense for the issuing bank to restrict the availability of the credit at its own counters but make its place of expiry with Bank C, Shanghai. Whatever the purpose behind such a move, the idea is misplaced. It cannot escape the default option. The credit is badly drawn.
  TABLE 11    
1 Query serial no. as per TA 717 : 11
2 Issuing bank location : London
3 LC expiry place : Issuing Bank
4 LC available with (i.e. nominated bank) : Any bank
5 Beneficiary. location : London
6 Options for presentation of documents : Analysis given below.

Analysis:

  • Facts: The beneficiary is in London; the credit is freely available with any bank, anywhere; no restriction in terms of the name of the bank or any geographical location. The credit expires at the counters of the issuing bank (in London). (The issuing bank could possibly be the beneficiary’s bank too, but it is not a factor in this example.)
  • Option 1: Since the credit is available with any bank, the beneficiary has the option to present documents to his own bank (presumably in London itself) for negotiation. Upon negotiation, the negotiating bank must ensure that the documents are delivered to the issuing bank prior to the expiry of the credit.
  • Option 2: The default option is always available to the beneficiary. Presentation to the issuing bank would meet both the requirements in the credit in terms of availability and the place of expiry.
  TABLE 12    
1 Query serial no. as per TA 717 : 16
2 Issuing bank location : London
3 LC expiry place : Bank C, Shanghai
4 LC available with (i.e. nominated bank) : Issuing Bank
5 Beneficiary. location : Shanghai
6 Options for presentation of documents : Analysis is given below.

Analysis:

  • The credit expires at the counters of Bank C, Shanghai, but is not available with Bank C. It is available only with the issuing bank. Hence, apart from the issuing bank, no other bank can act as a nominated bank or negotiate/honour documents under this credit.
  • The only option available to the beneficiary is to make a complying presentation to the issuing bank. Incidentally, it makes no sense for the issuing bank to restrict the availability of the credit at its own counters but make its place of expiry with Bank C, Shanghai. Whatever the purpose behind such a move, the idea is misplaced. The credit is badly drawn.
  TABLE 13    
1 Query serial no. as per TA 717 : 17
2 Issuing bank location : London
3 LC expiry place : Bank C, Shanghai
4 LC available with (i.e. nominated bank) : Any bank
5 Beneficiary. location : Shanghai
6 Options for presentation of documents : Analysis below.

Analysis:

  • Option 1: Present documents direct to the issuing bank (the “default option” under Article 6) prior to the expiry of the credit.
  • Option 2: Since the credit is freely available (not restricted in terms of a bank or place), present documents to Bank C, Shanghai (where the credit is also set to expire), provided Bank C (beneficiary’s bank?) agrees to negotiate. If not, see Option 3 below. (Subsequent delivery of these documents to the issuing bank has no limitation of time.)
  • Option 3: Since the credit is freely available (no bank or region specified), documents could be presented to any bank, anywhere (preferably the beneficiary’s own bank, possibly in Shanghai), provided that the documents are delivered to Bank C, Shanghai within the date of expiry of the credit. (Subsequent delivery of these documents to the issuing bank has no limitation of time.)
  TABLE 14    
1 Query serial no. : 20
2 Issuing bank location : London
3 LC expiry place : Confirming Bank
4 LC available with (i.e. nominated bank) : Any bank
5 Beneficiary. location : Shanghai
6 Options for presentation of documents : Analysis follows.

Analysis:

  • Option 1: Since the LC is freely available (no bank or location specified), the beneficiary may present documents to his own bank (or any other bank if it agrees to negotiate), and ensure that after negotiation the documents are delivered to the confirming bank or the issuing bank prior to the expiry of the credit.
  • Option 2: The location of the confirming bank has not been stated. However, since the credit is available with ‘any bank’, and the credit also expires at the counters of the confirming bank, the documents could be presented to the confirming bank (subject to the terms of confirmation).
  • Option 3: If presentation to the confirming bank is inconvenient – whatever the reason, direct presentation to the issuing bank always remains an option.
  TABLE 15    
1 Query serial no. as per TA 717 : 21
2 Issuing bank location : London
3 LC expiry place : China
4 LC available with (i.e. nominated bank) : Confirming bank, New York
5 Beneficiary. location : Shanghai
6 Options for presentation of documents : See analysis below.

Analysis:

  • A messy credit, if there was one. No logic for the issuing bank to straddle the globe in terms of parameters. (The issuing bank only left out the moon!)
  • The credit is available only with the confirming bank in New York. It is NOT available with any bank in China (or anywhere else). Hence, the documents cannot be presented to any bank in China.
  • For reasons explained elsewhere in this paper, presenting documents to the confirming bank (it being in New York, quite far from Shanghai, and being subject to the terms of confirmation) would not serve any useful purpose.
  • The better option for the beneficiary’s bank in Shanghai, China is to make a complying presentation of documents direct to the issuing bank.
  TABLE 16    
1 Query serial no. as per TA 717 : 23
2 Issuing bank location : London
3 LC expiry place : USA
4 LC available with (i.e. nominated bank) : Any bank
5 Beneficiary. location : Shanghai
6 Options for presentation of documents : Options analysed below

Analysis:

  • Option 1: Since the credit is available with any bank, anywhere, the documents may be presented for negotiation to any bank around the globe (including his own bank in Shanghai) provided the documents are submitted to a bank in the USA (place of expiry) prior to the expiry of the credit. However, note the KYC issues for banks that do not know the beneficiary.
  • Option 2: Since the credit is available with any bank, anywhere, the documents may be presented for negotiation to any bank around the globe (including his own bank in Shanghai) provided the documents are submitted to the issuing bank prior to the expiry of the credit. Beware KYC issue!.
  • Option 3: Since the credit is available with any bank, anywhere, it is feasible to present documents for negotiation to any bank in the USA within the expiry of the credit. However, why should any bank in USA agree to negotiate if it has no banking relationship with the presenter/beneficiary? Hence, back to square one!
  • Option 4: Make a complying presentation direct to the issuing bank.

Don’t you wish that SWIFT had confined itself strictly to the UCP?

===========

[1] Published in DCInsight, page 18-22, Vol 17 No. 4, October-December 2011.

[2] Home page: http://www.rnbose.com; e-mail: rnbose@gmail.com.

[3] “Does a credit need a ‘place of expiry’?”, Wang Shanlun, DC Insight, Volume 15, No. 3, and “Availability and expiry under Article 6, UCP 600”, Rupnarayan Bose, LCM-Trade Services Update, Volume 12, Issue 3, May–June 2010.

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