The Advising (Seller's) Bank Upon receipt of the credit from the issuing bank, the advising bank informs the seller that the credit has been issued. The advising bank will examine the credit upon receipt. The advising bank, however, examines the terms of the credit itself; it does not determine whether the terms of the credit are consistent with those of the contract between the buyer and the seller, or whether the description of goods is correctly stated in accordance with the contract. The advising bank then forwards the credit to the seller (E. G. Hinkelman 2004-2008, p.15).
Letter of credit
It is a method of payment for goods in which the buyer's bank guarantees to pay a specified amount of money to the seller on presentation of specific documents, before a certain date and according to the International Chamber of Commerce rules (I. MacKenzie 2008, p.54).
How a letter of credit can be verify
The authenticity of the letter of credit is normally verified by comparing the signature on the letter of credit with the signatures in the Authorized Signature Book of the overseas bank on file with the US bank. For letters of credit that are transmitted via teletransmission, the US bank verifies the "test" given by the overseas bank. Banks exchange test keys or a type of secret coding arrangement. The letter of credit can also be transmitted to an advising bank through the SWIFT system. SWIFT is a short for the Society for Worldwide International Financial Telecommunication and is a wire system owned and operated by banks (C. A. Sumangil 2014, p.17)
Role of the advising bank based on an example
Portland Cement and ACC are participants of transaction. Citibank is the advising bank. ABN AMRO is the nominated bank. The steps in the letter of credit payment process are as follows:
- ACC asks ABN AMRO to issue a letter of credit to be confirmed by Citibank.
- ABN AMRO reviews ACC's application and issues the letter of credit. It also requests that Citibank confirm the letter of credit.
- Citibank confirms the letter of credit and sends the letter of credit, along with a confirmation advice, to Portland.
- Portland ships the cement to ACC.
- Portland presents all required letter of credit documentation to Citibank, which reviews and approves them, and pays Portland $500,000, less transaction costs. Citibank sends the documents to ABN AMRO, which reviews and approves them. ABN AMRO sends $500,000 to Citibank.
- ABN AMRO sends the letter of credit documents to ACC, while also charging its account for euro equivalent of $500,000, plus transaction costs. ACC takes delivery of the masonry cement at Amsterdam on June 15. (S. M. Bragg 2010, p.31).
- Bragg S. M., (2010) Treasury Management: The Practitioner's Guide, John Wiley & Sons, New Jersey.
- Hinkelman E. G., (2000-2008), The World Trade Press Illustrated Guide to Letters of Credit, World Trade Press, California.
- Klotz J. M., (2014), Power Tools for Negotiating International Business Deals, Kluwer Law International, The Netherlands.
- MacKenzie I., (2010)., English for the Financial Sector, Cambridge University Press, Cambridge.
- Sumangil C. A., (2014)., Keys to Understanding Documentary Letters of Credit, Lulu Publishing Services, North Carolina.
Author: Katarzyna Siedlarczyk