We constantly receive feedback from exporting companies frustrated by the apparent inflexibility of banks when examining documents presented under letters of credit. The perception is that “banks enjoy finding discrepancies because of the fees they can earn. Easy money!”

But is this fair?

As a former documentary credits document examiner, I can honestly say that it was far preferable to check a set of complying documents than a set containing discrepancies. Why? Because it made my life easier!!!

Calling an exporter to advise of and discuss a list of discrepancies is never easy for a bank official, particularly if the client is anxious to receive the cash which they believed to be guaranteed. Many is the time that I faced the wrath of a disgruntled finance director as a consequence of finding discrepancies that could not be rectified due to late presentation or non-complying documents, which could not be easily amended (eg: documents issued by third parties – see our previous article – Do Letters of Credit Work? ).

Once documents containing such discrepancies are presented, options for the exporter are limited and normally require the advising bank to forward said documents to the issuing bank for approval (often referred to as forwarding ‘in trust’  or ‘on inspection’). The advising bank will then need to diarise and monitor the presentation for a response from the issuing bank, often having to send multiple chasers in order to receive final payment (assuming that the issuing bank and / or applicant approve this). A lot of administration, paperwork and cost!

A complying presentation to an advising bank happy to act on its nomination or confirming bank is far more straightforward as the document examiner, having successfully checked the documents can pass them on for immediate negotiation / payment or undertake to pay at maturity (acceptance or deferred payment credits).

Job done!

The key message here is that banks generally prefer to honour documents and it is incumbent on the exporter to prepare a complying presentation in order to facilitate prompt payment in accordance with the L/C terms.

(Check out our Top 5 Letter of Credit tips for Exporters )

That said, we are continuing to see evidence of certain banks in particular territories raising spurious discrepancies, which are not in the ‘spirit’ of and in many cases bear no relevance to the underlying transaction.

Recent examples include the case of a UK based nominated bank highlighting the following discrepancy:

“Import Licence number not quoted on draft”.

The requirement on the L/C under field 47A (additional conditions) was for “All shipping documents to quote L/C reference and Import Licence number.”

When queried by my client, the nominated bank in question agreed that under the provisions of the ICC publication International Standard Banking Practice (ISBP 745) Paragraph A19 (a), a draft is NOT classed as a shipping document. They were however concerned that the issuing bank (based on historical local practice) would raise this as a discrepancy and may refuse to honour.

This is by no means an isolated case and flies in the face of the ICC’s assertion that the letter of credit should be a facilitator of trade payment and NOT an obstacle.

Much work is being done in the background to convince banks that they should no longer be raising questionable discrepancies and indeed, ISBP was published with this objective in mind.

Reluctance of nominated banks to act on nominations due to such concerns should be challenged and we always encourage clients to dispute discrepancies that they believe to be invalid.

Check out our related training courses, which can be tailored to your requirements:

The Essential Guide to Letters of Credit for Exporters

Advanced Letters of Credit Training for Exporters