Confirmed letter of credit
|Confirmed letter of credit|
|Methods and techniques|
Confirmed Letter of Credit is a specific type of letter of credit. It can be used if seller considers creditworthiness of bank as questionable. In that case he can ask borrower for another guarantee from another bank. After the second bank backs the letter of credit it can be called confirmed one.
The documentary letter of credit is based on the fact that the bank acts on behalf of the importer, but on its own behalf undertakes to pay the exporter a fixed amount, after fulfilling certain conditions. Bank takes confirmation fee which size can differ based on: credit amount, duration, country, standing of first bank. (Popoli, G.S. 2013, s.253-257).
How it works
It is a letter of credit, in which the intermediary bank, in addition to the letter of credit notification, undertakes to repay the amount of the letter of credit to the exporter when this letter fulfills certain requirements. It is, therefore, an independent commitment of the intermediary bank to pay the amount of the letter of credit to the beneficiary on terms that are identical to the terms of the letter of credit. The intermediary bank is obliged to pay the exporter's payment on its own behalf. Settlements between banks do not in any way concern the beneficiary of the letter of credit, as they are independent. (Janda, K. 2013 s.13).
Participants of the confirmed letter of credit
Confirmed letter of credit can be created only when they are participating in appropriate units. The creation of a letter of credit are involced:
- Customer – importer / buyer: gives the bank written instructions and secures the coverage of funds. The client may claim losses against his bank, which arose in the event that the bank failed to follow instructions regarding the terms of the letter of credit.
- Beneficiary – exporter / seller: the letter of credit is opened on his page. Seller has no obligations under the letter of credit. He only has to adjust the goods, which results from the purchase - sale transaction. He has the right to receive payment if he fulfills the terms and conditions specified in the letter of credit. He will submit the appropriate documents according to the documents of the established letter of credit.
- Issuing bank - The client's bank, the importer's bank /: acts on the written request of the importer and on its own behalf, undertakes itself to pay to the beneficiary for documents submitted by him under the letter of credit. The letter of credit is opened on the basis of an agreement between the importer / ordering the opening of a letter of credit / and the bank which is to open it based on the order. It is the bank's obligation to pay for the documents submitted by the beneficiary in accordance with the terms of the letter of credit.
- Intermediary bank - The notification bank, the seller's bank /: The intermediary bank operates only within the limits of the opening bank's order, being its representative and borne by the intermediary Bank, which confirmed the letter of credit, settles the beneficiary on its own behalf, after presenting the required documents before receiving the claim from the opening bank. (UCP 600, 2007, s. 4).
Stages of making a letter of credit
There are four stages in the formation of the confirmed letter of credit:
- opening order
- opening a letter of credit by the bank
- notification and confirmation of the letter of credit
- execution of letters of credit
Beneficiary receives payments from confirmed letter of credit only on the basis of specific documents. Not all of the below are required, depend on the letter of credit agreement between the seller and the buyer:
- insurance documents
- transportation documents
- bills of exchange
Methods of defrauding confirmed letter of credit
There are four most popular methods that fraudsters use in international transport:
- falsification of documents by the beneficiary in order to obtain payment from the issuing bank when there is no freight in practice
- the goods delivered by the beneficiary do not comply with the contract of sales in quantity and quality
- selling the same cargo to more than one person
- issuing a document of title (bill of lading) twice for the same freight (Alavi, H. 2016, s.141).
- Alavi, H. (2016). Mitigating the Risk of Fraud in Documentary Letters of Credit. Baltic Jordan of European Studies, 1 (20), 139-156.
- Janda, K. (2013). The perfomance of export credit agencies in post-communist Central European countries. IES Working Paper, 10/2013.
- Kozolchyk, B. (1992). The paperless letter of credit and related documents of title. Law and Contemporary Problems, 55(3), 39-101.
- Popoli, G.S. (2013). Startegic Credit Management in Banks. PHI, Delhi. s. 253-257.
- Uniform Customs and Practice for Documentary Credits (2007) UCP 600. International Chamber of Commerce.
Author: Beata Kocyłowska