Chapter 11 Iiip

Chapter 11:
Documentary Credits, Part 2: Settlement (Making Payment)
Overview
• Settlement refers to the process of payment of the beneficiary(ies) to the credit after
presentation of documents under the credit. Utilization, availability of payment and settlement
are all closely related and often the terms are used interchangeably.
• Utilization is the process of the seller shipping the goods, presenting documentation and getting
paid. Availability and settlement are part of the same process, but refer more specifically to the
seller getting paid.
• There are three primary means of settlement:
(1) settlement by payment,
(2) settlement by acceptance, and
(3) settlement by negotiation.
Settlement by Payment
• If the credit is an irrevocable, confirmed credit, the value of the credit is available to the
beneficiary as soon as the terms and conditions of the credit have been met (as soon as the
prescribed document package has been presented to and checked by the confirming bank).
• In an unconfirmed credit the value of the credit is made available to the beneficiary once the
advising bank has received the funds from the issuing bank. See the following chapter for
information on confirmed and unconfirmed credits.
Settlement by Acceptance
• In settlement by acceptance the beneficiary presents the required documentation package to

the bank along with a time draft drawn on the issuing, advising, or a third bank for the value of
the credit.
• Once the documents have made their way to the buyer and found to be in order, the draft is
accepted by the bank upon which it is drawn (the draft is now called a bank acceptance) and it is
returned to the seller who holds it until maturity.
Settlement by Negotiation
• In settlement by negotiation the buyer accepts the documents and agrees to pay the bank after
a set period of time.
• This gives the buyer time (a grace period) between delivery of the goods and payment.
• The issuing bank makes the payment at the specified time, when the terms and conditions of
the credit have been met.
Settlement by Payment
• Procedure
Refer to the diagram on the facing page for each numbered step.
• Seller
1. The seller (beneficiary) ships the goods to the buyer and obtains a negotiable transport document
(negotiable bill of lading) from the shipping firm/agent.
2. The seller prepares and presents a document package to the advising/confirming bank consisting of
(a) the negotiable transport document, and (b) other documents (e.g., commercial invoice, insurance
document, certificate of origin, inspection certificate, etc.) as required by the buyer in the documentary
credit.
• Advising/Confirming Bank
3. The advising/confirming bank:
(a) reviews the document package making certain the documents are in conformity with the terms
of the credit, and
(b) pays the seller.
4. The advising/confirming bank then sends the documentation package by mail or by courier to the
issuing bank.
• Issuing Bank
5. The issuing bank:
of the credit and
(b) pays or reimburses the advising/confirming bank as previously agreed (in the documentary
credit).
6. Sends the document package by mail or courier to the buyer.
• Buyer
7. The buyer pays or reimburses the issuing bank as previously agreed.

Settlement by Acceptance
• Procedure
• Seller
(a) the negotiable transport document, (b) other documents (e.g., commercial invoice, insurance
document, certificate of origin, inspection certificate, etc.) as required by the buyer in the credit, and (c)
a draft drawn on the bank at the specified tenor (maturity date).
of the documentary credit, and
(b) accepts the draft and returns it to the seller.
4. The advising/confirming bank then sends the documentation package along with a statement that it
has accepted the draft by mail or by courier to the issuing bank.
• Issuing Bank
5. The issuing bank:
of the documentary credit and
(b) at maturity of the draft pays or reimburses the advising/confirming bank as previously agreed
(in the documentary credit).
• Buyer
7. The buyer pays or reimburses the issuing bank as previously agreed (in the documentary credit).
Settlement by Negotiation
• Procedure
• Seller
(a) the negotiable transport document, (b) other documents (e.g., commercial invoice, insurance
document, certificate of origin, inspection certificate, etc.) as required by the buyer in the credit, and (c)
a draft drawn on the bank.
of the documentary credit, and
(b) pays the seller.
4. The advising/confirming bank then sends the documentation package by mail or by courier to the
issuing bank.
• Issuing Bank
5. The issuing bank a) reviews the document package making certain the documents are in conformity
with the terms of the documentary credit and b) pays or reimburses the advising/confirming bank as
previously agreed (in the documentary credit).
• Buyer
7. The buyer pays or reimburses the issuing bank as previously agreed (in the documentary credit).
Chapter 12:
Documentary Credits, Part 3: Standard Credits
Revocable vs. Irrevocable Documentary Credits
• Documentary credits may be issued by the buyer and issuing bank as revocable or irrevocable.
• (The buyer must indicate either revocable or irrevocable on the application form to the issuing
bank.)
• Each has a distinct advantage for buyers and sellers.
Revocable Credit
• A revocable documentary credit gives the buyer and/or issuing bank the ability to amend or
cancel the credit at any time right up to the moment of intended payment without approval by,
or notice to, the seller.  Revocable credits are, therefore, of great advantage to the buyer.
• Revocable credits are, conversely, of great disadvantage to the seller as the credit may be
canceled at any time, even while the goods are in transit, giving the seller no security
whatsoever.  Although revocable credits are sometimes used between affiliated firms, sellers
are advised never to accept a revocable credit as a payment method.
Irrevocable Credit
• An irrevocable documentary credit constitutes a firm contractual obligation on the part of the
issuing bank to honor the terms of payment of the credit as issued. The buyer and issuing bank
cannot amend or cancel the credit without the express approval of the seller.
• Irrevocable credits are of advantage to the seller. As long as the seller complies with the terms
of the credit, payment will be made by the issuing bank. Virtually all documentary credits issued
today are irrevocable and so state on their face (on the face of the documentary credit itself).
Sellers are advised to insist upon an irrevocable credit from the buyer.
Confirmed vs. Unconfirmed Documentary Credits
• Payment under an irrevocable documentary credit is guaranteed by the issuing bank. However,
from the seller's perspective, this guarantee may have limited value as the issuing bank may be
(1) in a foreign country,
(2) beholden to the buyer,
(3) small and unknown to the seller, or
(4) subject to unknown foreign exchange control restrictions. The seller, therefore, might wish that
another, more local bank add its guarantee (confirmation) of payment to that of the issuing
bank.
Within the category of irrevocable credits there are two further options for the buyer and seller.
These are the irrevocable unconfirmed credit and the irrevocable confirmed credit. Once again,
each has a distinct advantage for buyers and sellers.
Unconfirmed (or Advised) Documentary Credit
• Under an unconfirmed documentary credit only the issuing bank assumes the undertaking to
pay, thus payment is the sole responsibility of the issuing bank. An unconfirmed documentary
credit will be communicated (advised) to the seller through a bank most likely located in the
seller's country, and the related shipping and other documents will usually be presented to that
bank for eventual payment.
• However, the final responsibility for payment rests with the issuing bank alone. The advising
bank may or may not negotiate the seller's draft depending on the degree of political and
financial risk anticipated in the issuing bank's country, as well as the credit standing of the
issuing bank.
• In dealing with a readily identifiable issuing bank in a developed country, an unconfirmed

documentary credit is very probably an acceptable, safe instrument for most sellers. If you have
any doubt about the issuing bank and its standing, you can check the name through a local bank
with an international department.
• Confirmed Documentary Credit
• Confirmed letters of credit carry the commitment to pay of both the issuing and the advising
banks. The advising bank adds its undertaking to pay to that of the issuing bank, and its
commitment is independent of that of the issuing bank.
•  when documents conforming to the requirements of the confirmed documentary credit are
presented in a timely manner, the payment from the advising bank to the seller is final in all
respects as far as the seller is concerned.
• Confirmed Documentary Credit
• Confirmed, irrevocable letters of credit give the seller the greatest protection, since sellers can
rely on the commitment of two banks to make payment. The confirming bank will pay even if
the issuing bank cannot or will not honor the draft for any reason whatever. In accordance with
the additional risk assumed by the banks, however, confirmed, irrevocable letters of credit are
more expensive than unconfirmed letters of credit.
• Note: Confirmed, irrevocable letters of credit are used most frequently in transactions involving
buyers in developing countries.
Irrevocable Straight Documentary Credit
• Definition
• An irrevocable straight documentary credit conveys a commitment by the issuing bank to only
honor drafts or documents as presented by the beneficiary of the credit.
• Explanation
• This means that the beneficiary of the documentary credit (the seller) is supposed to deal
directly with the issuing bank in presenting drafts and documents under the terms of the credit.
• It is quite normal for banks and other financial institutions to purchase the drafts and
documents of a beneficiary at a discount. For example, a seller may possess a draft obligating
the issuing bank to pay a stated sum in 90 days. If the seller needs the money he may wish to
sell it to his bank at a discount for immediate cash. In an irrevocable straight documentary credit
the issuing bank has no formal obligation to such a purchaser/holder of the draft.
• Uses
• The irrevocable straight documentary credit is typically used in domestic trade and for standby
credits, both situations where confirmation or negotiation is considered unnecessary because of
the reputation of the issuing bank.
• Advantages/Disadvantages
• The irrevocable straight documentary credit is of greatest advantage to the buyer who does not
incur a liability to pay the seller until his own bank reviews the documents.
Irrevocable Negotiation Documentary Credit
• Definition
• An irrevocable negotiation documentary credit conveys a commitment by the issuing bank to

honor drafts or documents as presented by the beneficiary or any third parties who might
negotiate or purchase the beneficiary's drafts or documents as presented under the
documentary credit.
• Explanation
• This means that the beneficiary of the documentary credit (the seller) may ask a third party bank
or financial institution to negotiate or purchase and resell drafts and documents as presented
under the documentary credit. The issuing bank commits to honoring drafts and documents
held by third parties so long as the beneficiary and third parties comply with the terms and
conditions of the documentary credit.
• Uses
• The great majority of documentary credits are freely negotiable. They are common in
international trade as a foreign seller typically wants to be able to obtain payment for a
shipment immediately from his local bank.
• This form of credit is of advantage to the seller in that he does not have to wait until the buyer's
bank reviews the documents to get paid the proceeds of the credit.
• Key Wording/Engagement Clause
• The obligation of the issuing bank in an irrevocable negotiation documentary credit is typically
stated in the credit itself with wording such as:
Irrevocable Unconfirmed Documentary Credit
• Definition
• An irrevocable unconfirmed documentary credit conveys a commitment by the issuing bank to

honor drafts or documents as presented by the beneficiary of the credit. Such a credit is advised
(notification to the beneficiary) through an advising bank.
• Explanation
• The advising bank is often the seller's bank in the seller's country and acts as an agent of the
issuing bank. The advising bank's responsibility is limited to a reasonable review of the
documents forwarded by the issuing bank prior to their being passed on to the beneficiary of
the credit.
• The advising bank specifically does not confirm (add its guarantee of) payment of the credit. This
means that the beneficiary of the documentary credit (the seller) will be paid by and has
recourse to the issuing bank only.
• Uses
• The irrevocable unconfirmed documentary credit is used when the reputation of the issuing
bank is strong enough to give confidence to the seller that he will get paid.
• There is a slight advantage to the buyer as the buyer is typically responsible for paying the
documentary credit fees. Since confirmation incurs a fee, the buyer would have a small savings.
• The obligation of the issuing bank in an irrevocable unconfirmed documentary credit is typically
Irrevocable Confirmed Documentary Credit
• Definition
• An irrevocable confirmed documentary credit is one that contains a guarantee on the part of
both the issuing and advising banks of payment to the beneficiary (seller) so long as the terms
and conditions of the credit are met.
• Explanation
• Confirmation is only added to an irrevocable credit at the request of the issuing bank.
Confirmation of an irrevocable documentary credit adds the guarantee of a second bank (usually
the seller's bank in the seller's country) to the credit. This means that the beneficiary of the
irrevocable confirmed documentary credit (the seller) will be paid by the confirming bank once
the terms and conditions of the credit have been met.
• Uses
• A confirmed credit is used when the seller does not have confidence that the buyer's bank can
effectively guarantee payment. It is also used when the seller fears economic, political, or legal
risk in the buyer's country.
• This is the most secure credit for the seller as it adds the guarantee of a second (and usually
local) bank to that of the issuing bank.
• Confirmation by a second bank is the equivalent of added insurance, and insurance costs
money, so this form of credit is more costly.
• The obligation of the issuing bank in an irrevocable confirmed documentary credit is typically
• Confirmation instructions: With, Confirm, or Confirmed
• and
• This credit is subject to the Uniform Customs and Practice for Documentary Credits (1993
Revision), International Chamber of Commerce, Publication Number 500, and engages us in
accordance with the terms thereof.
Silent Confirmation
• If a documentary credit does not contain a confirmation request by the issuing bank, in certain
circumstances the possibility exists of confirming the credit by silent confirmation (without the
issuing bank's knowledge). In this case the beneficiary and the advising bank make an
independent agreement that adds the advising bank's confirmation to the credit for a fee.
Chapter 13: Documentary Credits, Part 4: Special

Letters of Credit
Overview
• There are several special credits designed to meet the specific needs of buyers, suppliers, and
intermediaries. Special credits involve increased participation by banks, so financing and service
charges are higher.
Standby Credit
Standby credits are often called nonperforming letters of credit because they are only used if the
collection on a primary payment method is past due. Standby credits can be used to guarantee
repayment of loans, fulfillment by subcontractors, and securing the payment for goods delivered by
third parties.
Revolving Credit
• This is a commitment on the part of the issuing bank to restore the credit to the original amount
after it has been used or drawn down. This credit is used in cases where a buyer wishes to have
certain quantities of the ordered goods delivered at specified intervals, such as in a multiple
delivery contract.
Red Clause Credit
• A red clause credit has a special clause (red clause) that authorizes the confirming bank to make
advances to the beneficiary (seller) prior to the presentation of the shipping documents. In this
credit the buyer, in essence, extends financing to the seller and incurs ultimate risk for all sums
advanced under the credit.
Transferable Credit
• A transferable credit is one where the original beneficiary transfers all or part of the proceeds of
an existing credit to another party (typically the ultimate supplier of the goods). It is normally
used by middlemen as a financing tool.
Back-to-Back Credit
• This is a new credit opened on the basis of an already existing, nontransferable credit. It is used
by traders to make payment to the ultimate supplier. A trader receives a documentary credit
from the buyer and then opens another documentary credit in favor of the ultimate supplier.
The first documentary credit is used as collateral for the second credit. The second credit makes
price adjustments from which comes the trader's profit.
Standby Credit
• Definition
• A standby documentary credit is an obligation on the part of an issuing bank to pay a beneficiary
in the case of the nonperformance of the applicant.
• Explanation
• In a standard commercial documentary credit the issuing bank has an obligation to pay the
beneficiary based on the performance of the beneficiary (the beneficiary's fulfillment of the
terms and conditions of the credit). In a standby documentary credit the issuing bank is
obligated to pay the beneficiary based on the nonperformance of the applicant.
• Standby documentary credits are, therefore, also called "nonperforming letters of credit,"
because they are only used as a backup payment method if the collection on a primary payment
method is past due.
• Explanation
• A standby documentary credit is generally obtained and held in reserve or paid out only as a
result of noncompliance with some underlying contract between the parties involved.
• Exporters may be asked to provide a standby documentary credit as a requirement of working

on complicated infrastructure projects abroad or as an assurance under a contractual obligation
that they will perform as agreed. If the goods are provided, or the service performed, as agreed,
the standby documentary credit will expire unused. The exporter must also be certain that the
documents submitted are exactly as required in the documentary credit.
• Standby credits are often used in the United States as a legal form of bank guarantee (US law
prohibits banks from making certain types of guarantees).
• Uses
• Standby letters of credit can be used to guarantee the following types of payments and
performance:
• Repayment of loans
• Fulfillment by contractors and subcontractors
• Securing payment for goods or services delivered by third parties
• Since the beneficiary (typically the seller) of a standby documentary credit can draw from it on
demand the buyer assumes added risk.
Revolving Credit
• Definition
• A revolving documentary credit is an obligation on the part of an issuing bank to restore a credit
to the original amount after it has been utilized, without the need for amendment. A revolving
documentary credit can be revocable or irrevocable, cumulative or noncumulative, and can
"revolve" in number, time, or value.
• Explanation
• A revolving credit is designed to facilitate ongoing relationships between buyers and sellers
where buyers wish to purchase either (1) a set maximum value of product per period of time, (2)
a certain maximum value of product, or (3) as much product as the seller can produce or supply.
• NUMBER/TIME In this form, the credit may be available for a set value for a set number of times
—for example, US$10,000 per month for twelve months. Each month the seller may draw up to
US$10,000 and the issuing bank will automatically reinstate it for another US$10,000 for twelve
months. This form of credit may be cumulative or noncumulative.
• Explanation
• CUMULATIVE: In a cumulative revolving credit any sum not utilized by the beneficiary during an
installment period may be carried over and added to a subsequent installment period. Using the
above example, if the beneficiary only utilizes US$8,000 the first month, the value of the credit
the following month increases to US$12,000. With a total value (or from the banker's
perspective liability) of US$120,000, this cumulative revolving credit can be utilized for a
cumulative total of up to US$10,000 the first month, US$20,000 the second month, etc.
• Explanation
• NONCUMULATIVE: In this credit any value not utilized during an installment period may not be
carried over and added to a subsequent installment period.
• VALUE: In this form, the credit amount is reinstated after utilization for a potentially infinite
number of times during the validity period of the credit.
• Uses
• Revolving documentary credits are used in situations where a buyer and seller agree that goods
will be shipped on a continuing basis and where the parties to the credit wish to establish one
credit to handle all the shipments rather than to establish individual letters of credit for each
shipment.
• Note A credit for the full value of the goods to be shipped but requiring specific quantities to be
shipped weekly or monthly and allowing part-shipments is not a revolving credit. It is a credit
available by installments.
• Unless limited to a maximum value or a maximum number of revolutions, a revolving credit can
obligate the issuing bank and the applicant/buyer to potentially limitless liability.
Red Clause Credit
• Definition
• A red clause documentary credit is an obligation on the part of an issuing bank to guarantee
advance payments made by a confirming (or any other nominated bank) to the beneficiary prior
to presentation of documents.
• Explanation
• A red clause documentary credit is a mechanism for providing funding to the seller prior to the
shipment of goods. It is often used to assist manufacturers in paying for labor and materials
used in manufacturing or to middlemen who need financing to conclude a transaction.
Ultimately, it is a form of financing provided by the buyer to the seller.
• A red clause credit is so named because the clause authorizing advance payment is traditionally
written in red ink. The clause states the amount(s) of the authorized advances and any terms
and conditions of the advance(s). The authorized advance may be for up to the full amount of
the credit.
• Explanation
• EXAMPLE: A furniture manufacturer in Taiwan (the buyer/importer) through an issuing bank in

Taiwan opens a red clause documentary credit naming a hardwood lumber dealer in Indonesia
as beneficiary, with the dealer's Indonesian bank as the confirming bank. The hardwood dealer
draws against the red clause credit, obtaining funds from the bank to pay his suppliers as he
finds lumber that meets the needs of the furniture manufacturer in Taiwan.
• If the hardwood dealer is unable to ship the lumber according to the terms and conditions of the
original credit, the confirming bank in Indonesia has recourse to the issuing bank in Taiwan,
which also has recourse to the beneficiary (seller/hardwood dealer) in Indonesia.
• A red clause credit is useful to the buyer in situations where the supplier is trusted and the
difficulty of obtaining the raw materials/goods directly is high. The disadvantage to the buyer is
that the seller may not perform and the buyer may totally lose the paid advances. The
advantage to the seller is that another party is providing financing for the transaction. The
disadvantage to the seller is that he still maintains responsibility for ultimate delivery of goods,
and he is liable for repayment of the full amount of the credit, plus costs, if unable to perform.
Transferable Credit
• Definition
• A transferable documentary credit is one where the beneficiary may request that part of the
proceeds (payment) of the credit be transferred to one or more other parties who become
second beneficiaries.
• Explanation
• A transferable credit is used by a "middleman" who acts as an intermediary between a buyer

and a seller to earn a profit for structuring the transaction.
• The buyer opens a documentary credit naming the intermediary as the beneficiary. The
intermediary then transfers both the obligation to supply the goods and part of the proceeds of
the credit to the actual supplier.
• In the process, the intermediary commits little or no funds to the transaction. This form of
payment is often used in situations where the intermediary does not wish the buyer and the
actual supplier to know each other's identity.
• Details
• At the time of opening the credit the buyer must request that it be made transferable.
• The credit itself, as issued, must be clearly marked as "transferable." Terms such as "divisible,"
"fractionally," "assignable," or "transmissible" do not make the credit transferable.
• Transferable credits can be transferred once. A second beneficiary cannot transfer to a third
beneficiary.
• Transferable credits can be transferred in whole or in part.
• The fewer the documents specified and the simpler the terms stipulated in the original credit,
the smoother the transaction can be handled.
• Partial Quantities/Multiple Suppliers
• The transfer of partial quantities by multiple sellers to the buyer is possible but only if the credit
permits partial deliveries. Fulfillment of the original contract with the buyer through partial
quantities by multiple suppliers is more expensive as banks charge fees and/or commissions for
each transfer.
• The "middleman" may substitute his own invoices and drafts on the buyer, for those presented
to the bank by the seller (second beneficiary). The bank has the responsibility, however, of
reviewing such invoices and drafts against other documents to make certain they all conform
with the terms and conditions of the original credit.
• Permitted Changes to the Credit
• A transferable credit can be transferred only under the terms stated in the original credit.
However, the intermediary may transfer the credit with the following changes:
1. The name and address of the intermediary may be substituted for that of the original buyer (applicant
of the credit).
2. Unit prices and the total amount of the credit may be reduced to enable the intermediary an
allowance for profit.
• Permitted Changes to the Credit
• A transferable credit can be transferred only under the terms stated in the original credit.
However, the intermediary may transfer the credit with the following changes:
3. The expiration date, the final shipment date, and the final date for presentation of documents may all
be shortened to allow the intermediary time to meet obligations under the original credit.
4. Insurance coverage may be increased in order to provide the percentage amount of cover stipulated
in the original credit.
• Amendments to a Transferable Credit
• Since the ultimate buyer and the actual seller/supplier are separated by the intermediary there
is the question of how to deal with amendments. Do amendments by the buyer get sent
(advised) to the second beneficiary?
• The intermediary, therefore, must establish, irrevocably, at the time of the request for transfer
of the credit, and prior to the actual transfer of the credit, whether the transferring bank may
advise amendments to the seller (second beneficiary).
• Amendments to a Transferable Credit
• Options for transfer rights on amendments include full or partial transfer of the credit with
1. Retainment of rights on amendments
2. Partial waiver of rights on amendments
3. Waiver of rights on amendments
• If the transferring bank agrees to the transfer, it must advise the seller (second beneficiary) of
the intermediary's amendment instructions.
• Uses
• Transferable documentary credits are used as a financing tool in transactions where the buyer
trusts the intermediary.
• Since the transferable credit must be clearly marked "transferable," the buyer knows that the
first beneficiary is not the ultimate supplier and is relying upon the credit as the financing
instrument. This credit is generally for use only by more sophisticated traders.
• In this form of credit both the buyer and ultimate supplier may feel at a disadvantage not
knowing each other and placing their trust in an intermediary who did not have the financing to
conclude the transaction on his own. The more paperwork and the more parties to the
transaction, the greater the opportunity for problems.
• Transferable Credit Issuance Procedure
1. Intermediary (first beneficiary) contracts with seller (second beneficiary) to purchase goods.
2. Intermediary contracts to sell goods to buyer. (Or steps 1 and 2 are reversed.)
3. Buyer applies for and opens a documentary credit with issuing bank.
4. Issuing bank issues the documentary credit and forwards it to advising bank.
5. Advising bank notifies intermediary of documentary credit.
6. Intermediary orders transfer of documentary credit to seller (second beneficiary).
7. Advising bank transfers credit in care of transferring (seller's) bank.
8. Transferring bank notifies seller (second beneficiary) of documentary credit.
• Transferable Credit Assignment of Proceeds Procedure
1. Intermediary (first beneficiary) presents documents to the negotiating bank.

2. Negotiating bank pays intermediary any funds not assigned to the seller (second beneficiary).
3. Negotiating bank pays transferring bank who then in turn pays the seller (second beneficiary) the
assigned funds.
4. Negotiating bank presents documents to the issuing bank.
5. Issuing bank pays/reimburses the negotiating bank in accordance with the terms of the credit.
6. Issuing bank presents documents to the buyer.
7. Buyer pays/reimburses the issuing bank in accordance with the terms of the credit.
Back-to-Back Credit
• Definition
• A back-to-back documentary credit is a new documentary credit opened in favor of another

beneficiary on the basis of an already existing, irrevocable, non-transferable documentary
credit.
• Explanation
• As the name implies, a back-to-back documentary credit is actually two distinct documentary
credits:
• A documentary credit opened by the buyer naming the seller as the beneficiary, and
• A second documentary credit opened by the seller naming the actual supplier of the goods as
the beneficiary.
• Explanation
• A back-to-back credit is used in situations where the original credit is not transferable and where
the bank is willing to open the second credit at the request of the seller, using the first credit as
collateral or support for the second credit.
• The bank, however, is under no obligation to issue the second credit. In fact, most banks will
refuse to open such a credit unless they have extreme confidence in the seller's
creditworthiness and ability to perform. Because of the complexity of the transaction, banks see
the first credit less as collateral than as an item of support for issuance of the second credit.
• Explanation
• Since the seller is the applicant for the second credit, the seller is responsible to the bank for
payment regardless of whether or not he himself is paid under the first credit.
• The second credit must be carefully worded to require all the documents (except for the
commercial invoice) as required under the first credit. Also, since there is a time lag between
issuance of the first credit and the second credit, the second credit must be worded to require
that documents be presented in time to satisfy the requirements of the first credit.
• Uses
• The uses of a back-to-back documentary credit are similar to those of a transferable credit. The
seller/intermediary uses the financial strength of the buyer to effect the transaction.
• Since the first credit names the seller as the beneficiary the buyer is unaware that there is a
supplier other than the seller. This credit is generally for use only by more sophisticated traders.
The more paperwork and the more parties to the transaction, the greater the opportunity for
problems.
Back-to-Back Credit
• Back-to-Back Credit Issuance Procedure
1. Buyer and seller negotiate a contract. Seller places order with supplier.
2. Buyer applies for and opens a documentary credit with issuing bank.
3. Issuing bank issues the documentary credit and forwards it to advising bank.
4. Advising bank notifies seller of documentary credit.
5. Seller orders assignment of credit to supplier.
6. Advising bank assigns credit to supplier.
• Note At step 6 the advising bank may transfer the credit to a second advising or confirming
bank. This step is left out for the sake of simplicity.
• Back-to-Back Credit Utilization Procedure
1. Ultimate supplier ships goods and invoice to seller who in turn ships the goods to the buyer.
2. Seller forwards documents to advising bank.
3.
– Advising bank pays the supplier the amount designated in seller's assignment order.
– Advising bank pays the seller the difference between the original credit amount and the
amount assigned to the supplier.
4.
– Advising bank forwards documents to the issuing bank.
– Issuing bank pays advising bank.
5. Issuing bank forwards documents to buyer.
6. Buyer pays issuing bank.
Chapter 14:
Documentary Credits, Part 5: Issues and Checklists
Regarding the Role of Banks
• It is important to note that documentary credit procedures are not infallible. Things can and do
go wrong. Since banks act as intermediaries between the buyer and seller, both look to the
banks as protectors of their interests. However, while banks have clear cut responsibilities, they
are also shielded from certain problems deemed to be out of their control or responsibility.
• Several instances:
• Banks act upon specific instructions given by the applicant (buyer) in the documentary credit.
Buyer's instructions left out of the credit by mistake or omitted because "we've always done it
that way" don't count. The buyer, therefore, should take great care in preparing the application
so that it gives complete and clear instructions.
• 2. Banks are required to act in good faith and exercise reasonable care to verify that the
documents submitted appear to be as listed in the credit. They are, however, under no
obligation to confirm the authenticity of the documents submitted.
• 3. Banks are not liable nor can they be held accountable for the acts of third parties. Third
parties include freight forwarders, forwarding agents, customs authorities, insurance
companies, and other banks. Specifically, they are not responsible for delays or consequences
resulting from Acts of God (floods, earthquakes, etc.) riots, wars, civil commotions, strikes,
lockouts, or other causes beyond their control.
• 4. Banks also assume no liability or responsibility for loss arising out of delays or loss in transit of
messages, letters, documents, etc.
• 5. Because banks deal in documents and not goods, they assume no responsibility regarding the
quantity or quality of goods shipped. They are only concerned that documents presented
appear on their face to be consistent with the terms and conditions of the documentary credit.
Any dispute as to quality or quantity of goods delivered must be settled between the buyer and
the seller.
6. So long as the documents presented to the banks appear on their face to comply with the terms and
conditions of the credit, banks may accept them and initiate the payment process as stipulated in the
documentary credit.
• If there are any conclusions to be made from the above they are: first, that the buyer and seller
should know each other and have at least some basis of trust to be doing business in the first
place, and second, that all parties to the transaction should take responsibility to follow through
on their part carefully.
Common Problems with Documentary Credits
• Despite the protections offered by a documentary credit, problems can and do arise. Most
problems have to do with the ability of the seller to fulfill the obligations established by the
buyer in the original documentary credit, or with discrepancies in the documents presented by
the seller under the documentary credit.
• Some of the common problems sellers have with documentary credits are:
1. Shipment schedule stipulated in the documentary credit cannot be met.
2. Stipulations concerning freight costs are deemed unacceptable.
3. Price is insufficient due to changes in exchange rates.
4. Quantity of product ordered is not the expected amount.
5. Description of product to be shipped is either insufficient or too detailed.
6. Documents stipulated in the documentary credit are difficult or impossible to obtain
Discrepancies with Documents
• Perhaps the greatest problem associated with documentary credits is discrepancies with
documents as they are prepared, presented, and reviewed by sellers, buyers, and the banks. All
parties have the obligation to check the documentation to make certain it is in order and all
parties are at risk for failing to do so properly.
• The buyer can introduce problems to the process by specifying documents that are difficult or
impossible to obtain. The seller can introduce problems by incorrectly preparing and presenting
the document package to his bank.
• Advising, confirming, and issuing banks can introduce problems by incorrectly reviewing
(negotiating in bank language) the documents provided by the seller against the requirements of
the documentary credit.
• Conformity with the Documentary Credit

• The key issue is that the documents presented by the seller must be in conformity with the
specifications of the documentary credit. Once again, banks deal in documents, not goods. The
banks, therefore, are seeking conformity of the documentation to the wording of the credit and
not of the goods to the documents.
• The bottom line is that if the seller's documents are not prepared in accordance with the terms
and conditions of the credit, the bank is under no obligation to pay the seller for the shipment.
(Note the seller's document presentation checklist on the pages that follow.)
• Bank Options
• Banks have up to seven banking days following the receipt of documents to examine and notify
the party from which it received the documents of their acceptance or nonacceptance. If a bank
involved in the transaction finds discrepancies in the documents, it has several options:
• The advising or confirming bank can refuse to accept the documents and return them to the
seller (beneficiary) so that they can be corrected or replaced.
• The issuing bank, if it feels the discrepancy is not material to the transaction, can ask the buyer
(applicant) for a waiver for the specific discrepancy, but must do so within seven banking days.
The advising or confirming bank can remit the documents under approval to the issuing bank for
settlement
• The issuing or confirming bank can return the incorrect document(s) directly to the seller for
correction or replacement and eventual return directly to the issuing or confirming bank.
• The bank can proceed with payment to the seller but require a guarantee from the seller to
reimburse the bank if the issuing bank does not honor the documents as presented.
• If there is a discrepancy, the buyer and seller must communicate directly and then inform the
banks of their decision. In the case of serious discrepancies, an amendment to the credit may be
necessary.
• The seller may request the opening bank to present the documents to the buyer on a collection
basis. However, the buyer may refuse to accept the merchandise and be responsible for
shipping and insurance costs.
Electronic Applications for Documentary Credits
• Electronic application for documentary credits is becoming more and more common. Buyers
install software in their office PCs that enable them to fill out an application and send it via
modem to the bank processing center. Security is provided using a special password system.
Electronic applications enable the repeat letter of credit applicant faster turnaround and cut
paperwork for the bank.
Fraud
• As has been repeatedly stated, documentary credits are not foolproof. There are layers of
protection for both the buyer and the seller, but opportunities for fraud do exist.
• Many of the opportunities for fraud center around the fact that banks deal in documents and
not goods, and therefore the seller has the opportunity for presenting fraudulent documents.
• The seller will have difficulty doing this more than once or twice as no bank will repeatedly
accept documents from a supplier accused of such practices.
• Most every country has criminal statutes against fraud and the seller will eventually get caught,
but perhaps only after you have been defrauded.
•  It is always best to know your counterpart and the banks involved and to exercise caution
and common sense in making decisions.
• The situations listed below are extremely uncommon, but do exist.
1. Sellers have reported receiving an advice or a confirmation of a documentary credit from nonexisting
banks. The perpetrator of the fraud attempts to get the seller to ship goods and present documents for
payment to a bank that does not exist. By the time the seller is aware of the fraud, the "buyer" has
received the goods.
2. Buyers have reported receiving empty crates or crates filled with sand instead of the merchandise
they ordered. By the time they received the shipment the banks had already paid the "supplier."
3. Buyers have reported receiving defective merchandise from sellers. While there may be some latitude
for interpretation of what constitutes "defective," it is clear that some suppliers have purposefully
shipped incorrect or substandard goods.
4. Buyers have reported being short-shipped. In some cases buyers have ordered a valuable commodity
sold by weight and were shortchanged by being charged for the gross weight rather than the net weight.
They were charged the commodity price per kilogram for the packing materials.
5. Buyers of commodities, especially gray market goods, have reported being defrauded by the seller's
providing fraudulent shipping documents, evidencing shipment on a nonexistent ship.
Contract Provision
• When a buyer and seller agree to use a documentary credit for payment in the purchase/sale of
goods, they are well-advised to insert a payment provision in their contract to that effect. The
following is a sample contract provision.
• PAYMENT: To secure payment, the BUYER NAME shall have ISSUING BANK NAME open an
IRREVOCABLE documentary credit naming SELLER as beneficiary.
• The documentary credit is to be CONFIRMED by CONFIRMING BANK NAME. The documentary

credit must remain valid for NUMBER OF MONTHS after issuance and be available AT SIGHT
against presentation of the following documents:
1. ...
2. ...
3. etc.
4. The cost of the credit is to be paid by BUYER NAME.
5. The credit shall be subject to the Uniform Customs and Practice for Documentary Credits (1993
Revision), International Chamber of Commerce, Publication Number 500.
6. The items in small capital letters are the variables. As with all legal matters it is best to consult
with an experienced attorney for exact wording to best reflect your individual transaction.
Notes on Insurance
1. If the documentary credit stipulates CIF (Cost Insurance and Freight) or CIP (Cost and Insurance Paid)
terms the seller is responsible for providing insurance against damage or loss to the shipment. More
specifically, the seller is responsible for presenting an insurance document with the document package
that evidences insurance cover.
2. The credit should name the specific type of insurance coverage required and any additional risks that
are to be covered. The terms "usual risks" or "customary risks" should not be used as they will be
ignored by the banks. The buyer should be specific as to what insurance document is required, the dates
of coverage, and the amount of coverage.
3. The insurance document is typically issued in duplicate and, if so, both originals must be presented
with the document package.
4. The insurance document must be issued by an insurance company or its agent. Cover notes issued by
brokers are not acceptable unless authorized in the credit. Banks will, unless otherwise stated in the
credit, accept an insurance certificate under an open insurance cover which is presigned by the
insurance company or underwriter.
5. The insurance document must indicate that the cover is effective at the latest from the date of
loading of the goods on board a transport vessel or the taking in charge of the goods by the carrier, as
indicated by the transport document (bill of lading, etc.).
6. The insurance document must specify coverage for at least 110 percent of either: (a) the CIF or CIP
value of the shipment, if such can be determined from the various documents on their face, otherwise,
(b) the amount of the payment, acceptance, or negotiation specified in the documentary credit, or (c)
the gross amount of the invoice.
7. The insurance currency (e.g., US dollars, Japanese yen, etc.) should be consistent with the currency of
the documentary credit.
8. Even if the buyer has responsibility under the contract to insure the shipment, the seller still may wish
to take out contingency coverage to cover the possibility that the insurance steps taken by the buyer are
inadequate.
9. If a documentary credit calls for an insurance document specifying "insurance against all risks," the
banks will accept an insurance document containing any "all risks" notation or clause, even if the
document indicates that certain risks are excluded.
Notes for the Buyer

1. Before opening a documentary credit, the buyer should reach agreement with the seller on all
particulars including description of the goods, quantities, unit price and total price, terms of sale (FOB,
CIF, etc.), shipment schedule, and documents to be presented by the seller.
2. When choosing the type of documentary credit to be used, the buyer should take into account
standard payment methods in the country of the seller.
3. When opening a documentary credit, the buyer should keep the requirements and required
documentation to a minimum.
4. Documents specified in the documentary credit should include all those the buyer requires for
customs clearance.
5. The buyer should be prepared to amend or renegotiate terms of the credit with the seller. This is a
common procedure in international trade. On irrevocable letters of credit amendments may be made
only if all parties involved in the documentary credit agree.
6. The buyer should use a bank experienced in foreign trade as the issuing bank.
7. The validation time stated on the documentary credit should give the seller adequate time to produce
the goods or to pull them from stock.
8. The buyer should be aware that documentary credits are not fail-safe. Banks are responsible only for
the documents exchanged and not the goods shipped. Documents in conformity with documentary
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.
9. Purchase contracts and other agreements pertaining to the sale between the buyer and seller are not
the concern of the issuing bank. Only the terms of the documentary credit are binding on the bank.
Notes for the Seller—1
1. Before signing a 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. The seller should confirm the good standing of the buyer's bank if the credit is unconfirmed.
3. For a confirmed credit, it is preferable that the seller's regular commercial bank make the
confirmation.
4. The seller should carefully review the documentary credit to make sure its conditions can be met,
particularly schedules of shipment, type of goods to be sent, packaging, and documentation. All aspects
of the documentary credit must be in conformance with the terms agreed upon, including the seller's
name and address, the amount to be paid, and the prescribed transport route.
5. The seller must comply with every detail of the documentary credit specifications; otherwise the
security given by the credit is lost.
6. The seller should ensure that the documentary credit is irrevocable.

7. If conditions of the credit have to be modified, the seller should contact the buyer immediately so the
buyer can instruct the issuing bank to make the necessary amendments.
8. The seller should confirm with the insurance company that it can provide the coverage specified in
the credit and that insurance charges in the documentary credit are correct. Typical insurance coverage
is for CIF (cost, insurance, freight), often the value of the goods plus 10 percent.
9. The seller must ensure that the details of the goods being sent comply with the description in the
documentary credit and that their description in the invoice matches that on the documentary credit.
10. The seller should be familiar with foreign exchange limitations in the buyer's country that could
hinder payment procedures.
• Document Checklist Prior to Submission to the Bank
1. Do all the documents refer to the same order and the same credit?
2. Are the documents present in the correct number and in complete sets?
3. Is the name and address of the shipper correct?
4. Is the name and address of the buyer/consignee correct?
5. Is the issuer name and address correct?
6. Does the description of the goods, unit price, and total price match the description in the credit?
7. Is the description of the goods, unit price, and total price consistent from document to document?
8. Does the invoice total not exceed the amount available in the credit?
9. Is the country of origin of the goods listed and as specified in the documentary credit?
10. Is the country of destination of the goods listed and as specified in the documentary credit?
11. Do all the dimensions, weights, number of units, and markings agree on all documents?
12. Have all the necessary documents been certified or legalized?
13. Are the invoice numbers and documentary credit numbers correct and listed in the proper places?
14. Is the bill of exchange legally signed?
15. Does the bill of exchange have to be endorsed?
16. Does the insurance document cover all the risks specified in the credit?
17. Has the insurance document been properly endorsed?
18. Are the documents being presented within the validity period?
19. Is the bill of lading "clean," without notations?
20. If the bill of lading has an "on deck" notation, does the credit allow for it?
21. If the bill of lading is a charter party bill, does the credit allow for it?
22. Is the notify address in the bill of lading correct?
23. Is the bill of lading endorsed?
24. Are corrections properly initialed by their originator?
Chapter 16: Documents

Overview
• This chapter deals with issues related to the documents used in international payments. By
extension, these are also the most common documents used in international trade. Each
document will be defined, key elements listed, and cautions offered concerning important issues
and common problems associated with each.
• It is important to once again mention that the technical name for letters of credit is
documentary credits and, along with documentary collections, that documents are at the heart
of all forms of international payment.
• The documents called for by a payment type will differ somewhat according to the nature of the
goods and the countries of export and import. Some documents, however, such as the
commercial invoice and a bill of lading, are specified in all transactions.
• Before specifying the required documents the buyer should ensure that the seller is willing and
able to provide the documents called for and that they can be provided in the form and with the
details stipulated.
Consistency Among Documents
• One of the major issues in the preparation, presentation, and verification of documentation by
sellers, buyers, and banks in payment transactions is consistency among documents. All parties
have the obligation to check the documentation to make certain it is in order.
• EXAMPLE: In examining the documentation for a transaction involving the sale of five pieces of
machinery, the buyer noticed that the commercial invoice listed the net weight as 12,140
kilograms and the gross weight as 12,860 kilograms. The bill of lading, however, listed the gross
weight as 9,612 kilograms.
• What happened to the other 3,248 kilograms? Did the seller make a mistake in preparing the
commercial invoice? Did the shipping company make a mistake in preparing the bill of lading?
Did the seller forget to ship one or more pieces of machinery? Did the shipping company
misplace some machinery? Did someone steal the machinery?
• In the above example, the seller should have noticed the inconsistency before forwarding the
documents to the advising bank. The advising bank should have noticed the inconsistency
before forwarding the documents to the issuing bank. The issuing bank should have noticed the
inconsistency before forwarding the documents to the buyer. The buyer will most certainly
reject this documentation.
Documentation Consistency Checklist
• The following is a list of points of consistency buyers, sellers, and banks should all be aware of
when preparing, presenting, and checking documents for documentary credit and documentary
collection transactions:
1. Name and address of shipper
2. Name and address of buyer/consignee
3. Issuer name and address
4. Description of the goods, quantities, units
5. Country of origin of the goods
6. Country of destination of the goods
7. Invoice numbers, documentary credit numbers
8. Certifications
9. Legalizations
10. Shipping marks and numbers
11. Net weight, gross weight, volume
12. Number of crates, cartons, or containers
Issues Relating to Documents
• Ambiguity as to Issuers of Documents
• If terms such as "first class," "well-known," "qualified," "independent," "official," "competent,"

or "local" are used in a documentary credit to refer to the issuer of a required document (e.g.,
inspection certificate or certificate of origin), banks are authorized to accept whatever
documents are presented, provided that on their face they appear to be in compliance with the
credit and were not issued by the seller (beneficiary).
• Originals
• The originals of specified documents should be provided unless copies are called for or allowed.
If more than one set of originals is required, the buyer should specify in the credit how many are
necessary.
• Unless otherwise noted in the documentary credit, banks are authorized to accept documents
as originals, even if they were produced or appear to have been produced on a copy machine,
by a computerized system, or are carbon copies, provided they have the notation "Original" and
are, when necessary, signed.
• Authentication
that are authenticated, validated, legalized, visaed, or certified so long as the document appears
on its face to satisfy the requirement. This means that the banks are not responsible for the
verification of the certification or authorized signature. Certificates must usually bear the
signature of the issuer.
• Signature
• Banks are authorized to accept documents that have been signed by facsimile, perforated
signature, stamp, symbol, or any other mechanical or electronic method.
• Unspecified Issuers or Contents of Documents
• If the credit does not name a specific issuer or specific contents of a document (other than
transport documents, insurance documents, and the commercial invoice), banks are authorized
to accept documents as presented so long as the data contained in the documents are
consistent with the credit and other stipulated documents.
• Issuance Date vs. Documentary Credit Date
dated prior to the issuance date of the credit, so long as all other terms of the credit have been
satisfied.
Document List
• The following is a list of common documents used in international payment transactions. Other
documents may be required depending upon unusual or industry-specific transactions.
1. Commercial Invoice
2. Marine/Ocean/Port-to-Port Bill of Lading
3. Non-Negotiable Sea Waybill
4. Charter Party Bill of Lading
5. Multimodal (Combined) Transport Document
6. Air Transport Document (Air Waybill)
7. Road, Rail, or Inland Waterway Transport Documents
8. Courier Receipt
9. Post Receipt
10. Insurance Document (or Certificate)
11. Certificate of Origin
12. NAFTA Certificate of Origin
13. Certificate of Origin Form A

14. Packing List
15. Inspection Certificate
16. Export License
17. Consular Invoice
18. Shipper's Export Declaration (SED)
Commercial Invoice
• Definition
• The commercial invoice is the key accounting document describing the commercial transaction
between the buyer and the seller.
• Key Elements
The commercial invoice includes the following elements:
1. Name and address of seller
2. Name and address of buyer
3. Date of issuance
4. Invoice number
5. Order or contract number
6. Quantity and description of the goods
7. Unit price, total price, other agreed upon charges, and total invoice amount stated in the currency of
the documentary credit (e.g., US$, DM, ¥, etc.)
8. Shipping details including: weight of the goods, number of packages, and shipping marks and numbers
9. Terms of delivery and payment
10. Any other information as required in the documentary credit (e.g., country of origin)
• Cautions & Notes
• In transactions involving a documentary credit it is vitally important that the description of the
goods in the commercial invoice correspond precisely with the description of goods in the
documentary credit.
• The invoice amount should match exactly (or at least should not exceed) the amount specified in
the credit. Banks have the right to refuse invoices issued for amounts in excess of the amount
stated in the credit. For this, as well as other reasons, the invoice should be made out in the
same currency as the credit amount.
• The exception: when a documentary credit specifies "about" in relation to the currency amount
and quantity of merchandise, in which case the invoice may specify an amount equal to plus or
minus 10 percent of the stipulated amount of the credit.
• Unless otherwise stipulated in the documentary credit, the commercial invoice must be made
out in the name of the applicant (buyer). The exception: In a transferable documentary credit
the invoice may be made out to a third party.
• The buyer, seller, and bank(s) should all carefully check for discrepancies in the invoice. The
details specified therein should not be inconsistent with those of any other documents, and
should exactly conform to the specifications of the credit.
Transport Documents
• Bills of Lading
• A bill of lading is a document issued by a carrier to a shipper, signed by the captain, agent, or
owner of a vessel, furnishing written evidence regarding receipt of the goods (cargo), the
conditions on which transportation is made (contract of carriage), and the engagement to
deliver goods at the prescribed port of destination to the lawful holder of the bill of lading.
• A bill of lading is, therefore, both a receipt for merchandise and a contract to deliver it as freight.
There are a number of different types of bills of lading and a number of issues that relate to
them as a group of documents.
• Straight Bill of Lading (Non-Negotiable)
• A straight bill of lading indicates that the shipper will deliver the goods to the consignee. The
document itself does not give title to the goods (non-negotiable). The consignee need only
identify himself to claim the goods. A straight bill of lading is often used when payment for the
goods has already been made in advance or in cases where the goods are shipped on open
account. A straight bill of lading, therefore, cannot be transferred by endorsement.
• Shipper's Order Bill of Lading
• A shipper's order bill of lading is a title document to the goods, issued "to the order of" a party,
usually the shipper, whose endorsement is required to effect its negotiation. Because it is
negotiable, a shipper's order bill of lading can be bought, sold, or traded while goods are in
transit. These are highly favored for documentary credit transactions. The buyer usually needs
the original or a copy as proof of ownership to take possession of the goods.
• Blank Endorsed Negotiable Bill of Lading
• A blank endorsed negotiable bill of lading is one that has been endorsed without naming an
endorsee. In simple terms, the person in possession of a blank endorsed negotiable bill of lading
may claim possession of the goods.
• Air Waybill
• An air waybill is a form of bill of lading used for the air transport of goods and is not negotiable.
• Clean Bill of Lading
• A clean bill of lading is one where the carrier has noted that the merchandise has been received
in apparent good condition (no apparent damage, loss, etc.) and that does not bear such
notations as "Shipper's Load and Count," etc.
• Most forms of payment require a "clean" bill of lading in order for the seller to obtain payment
under a documentary credit. There are, however, some circumstances in some trades, in which
transport documents with special clauses are acceptable. For example, in the steel trade, such
notations are the rule rather than the exception. If this is the case, the credit should explicitly
state which clause(s) will be deemed acceptable.
• Claused Bill of Lading
• A claused bill of lading is one which contains notations that specify a shortfall in quantity or
deficient condition of the goods and/or packaging. Opposite of clean bill of lading.
• Multiple Modes of Transport
• If multiple modes of transport are to be permitted, or partial shipments are allowed, and part of
the goods will be shipped by one mode of transport and part by another, it is necessary to put
"or" or "and/or" between the names of the required transport documents. For example, if the
goods are to be shipped by both sea and air, the credit might specify "marine bill of lading
and/or air waybill."
• Originals
• In documentary credit transactions the full set of original transport documents (one or more)
must be presented to the bank. If the full set of transport documents consists of several
originals, all of the originals should be submitted. The buyer (applicant) can stipulate in the
credit the number of originals to be issued in a set—but many countries consider a set of one
original only to be desirable.
• Named Carrier
• A transport document must appear on its face to have been issued by a named carrier, or his
agent. This does not mean that the applicant must name the carrier in the documentary credit
application. It merely means that the transport document must indicate the name of the carrier.
The applicant is, of course, free to stipulate a particular carrier, but this could cause delay in
shipping the goods.
• On Deck
• A transport document that specifically states that the goods are loaded "on deck" (subject to
wind and weather) will not be acceptable in documentary credit transactions unless specifically
authorized. If the transport document shows that the goods are loaded on deck, any
accompanying insurance document must show cover against "on deck" risks. Bear in mind,
however, that dangerous cargo (including certain chemicals and live animals) are often carried
on deck.
• On Board
• "On board" is a notation on a bill of lading indicating that the goods have in fact been loaded on
board or shipped on a named vessel. This notation may be made by the carrier, his agent, the
master of the ship, or his agent. Unless expressly authorized, the transport document issued by
the carrier must reflect that it is "on board" in order for the seller to obtain payment under a
documentary credit.
Marine/Ocean/Port-to-Port Bill of Lading
• Definition
• A marine bill of lading is a transport document covering port-to-port shipments of goods (for
carriage of goods solely by sea).
• Key Elements
The marine bill of lading contains the following elements:
1. Name of carrier with a signature identified as that of carrier, or ship's master, or agent for or on
behalf of either the carrier or ship's master
2. An indication or notation that the goods have been loaded "on board" or shipped on a named vessel.
Also, the date of issuance or date of loading
3. An indication of the port of loading and the port of discharge as specified in the original documentary
credit
4. A sole original, or if issued in multiple originals, the full set of originals.
5. The terms and conditions of carriage or a reference to the terms and conditions of carriage in another
source or document
6. No indication that the document is subject to a charter party and/or an indication that the named
vessel is propelled by sail only
7. Meets any other stipulations of the documentary credit
• If the document includes the notation "intended vessel" it must also contain an "on board"
notation of a named vessel along with the date of loading, even if the named vessel is the same
as the intended vessel.
• If the document indicates a place where the goods were received by the carrier different from
the port of loading, the document must also contain an "on-board" notation indicating the port
of loading as named in the credit and the named vessel, along with the date.
• If the documentary credit calls for a port-to-port shipment but does not call specifically for a
marine bill of lading, the banks will accept a transport document, however named, that contains
the above information. Banks will normally accept the following documents under this title:
ocean bill of lading, combined transport bill of lading, short form bill of lading, or received for
shipment bill of lading, provided it carries the notation "on board."
• If the documents are drawn up "to the order of" the exporter or "to order" they must be
endorsed.
• If the credit prohibits transshipment this document will be rejected if it specifically states that
the goods will be transshipped.
• Since this is a negotiable instrument, it may be endorsed and transferred to a third party while
the goods are in transit.
Non-Negotiable Sea Waybill
• Definition
• A non-negotiable sea waybill is a transport document covering port-to-port shipments. It is not a

title document, is not negotiable and cannot be endorsed.
• Key Elements
• The non-negotiable sea waybill contains the following elements:
1. Name of carrier with a signature identified as that of carrier, or ship's master, or agent for or on
behalf of either the carrier or ship's master
credit
4. A sole original, or if issued in multiple originals, the full set of originals
source or document
• If the document includes the notation "intended vessel" it must also contain an "on board"
notation of a named vessel along with the date of loading, even if the named vessel is the same
as the intended vessel.
• If the document indicates a place where the goods were received by the carrier different from
the port of loading, the document must also contain an "on-board" notation indicating the port
of loading as named in the credit and the named vessel, along with the date.
• If the documentary credit calls for a port-to-port shipment but does not call specifically for a
marine bill of lading, the banks will accept a transport document, however named, that contains
the above information. Banks will normally accept the following documents under this title:
ocean bill of lading, combined transport bill of lading, short form bill of lading, or received for
shipment bill of lading, provided it carries the notation "on board."
• Because they are not title documents, sea waybills eliminate many of the inconveniences of a
bill of lading and offer advantages in situations where the rigid security of a bill of lading is not
required. Waybills reduce the opportunity for fraud—although they do by no means eliminate it
—and they remove the problems of goods arriving ahead of documents.
• Sea waybills are appropriate for shipments between associated companies, for shipments to an
agent for sale at destination on an open account basis, and for shipments between companies
that have established mutual trust.
Charter Party Bill of Lading
• Definition
• A charter party bill of lading is a transport document covering port-to-port shipments of goods
issued by a party chartering a vessel (as opposed to a named carrier or shipping line).
• Key Elements
• The charter party bill of lading contains the following elements:
1. An indication that the bill of lading is subject to a charter party
2. A signature or authentication by the ship's master or owner, or agent for or on behalf of either the
ship's master or owner
3. Unless otherwise stated in the documentary credit, does not name the carriera
credit
7. No indication that the named vessel is propelled by sail only
• The charter party bill of lading may have preprinted wording indicating that the shipment has
been loaded "on board" the "named vessel," but the document must still be signed as per
number two above.
• If preprinted wording is used, the date of issuance is deemed to be the date of loading on board.
In all other cases the document must contain an "on board" "named vessel" notation along with
the date the shipment was loaded on board.
Multimodal (Combined) Transport Document
• Definition
• A multimodal transport document is a bill of lading covering two or more modes of transport,
such as shipping by rail and by sea.
• Key Elements
• The multimodal transport document contains the following elements:
1. Name of carrier or multimodal transport operator with a signature identified as that of carrier,
transport operator, or ship's master, or agent for or on behalf of either the carrier, transport operator,
or ship's master
2. An indication that the shipment has been "dispatched," "taken in charge," or "loaded on board,"
along with a date.
3. Indication of the place of receipt of the shipment as named in the documentary credit that may be
different from the place of actual loading "on board" and the place of delivery of the shipment as named
in the documentary credit, which may be different from the place of discharge
source or document other than the multimodal transport document
7. Meets any other stipulations of the documentary credit.
• In multimodal situations the contract of carriage and liability is for a combined transport from
the place of shipment to the place of delivery. Thus, the document evidences receipt of goods
and not shipment on board.
• The date of issuance of the document is deemed to be the date of dispatch unless there is a
specific date of dispatch, taking in charge, or loading on board, in which case the latter date is
deemed to be the date of dispatch.
• Even if a credit prohibits transshipment, banks will accept a multimodal transport document
that indicates that transshipment will or may take place, provided that the entire carriage is
covered by one transport document.
• A combined transport document issued by a freight forwarder is acceptable unless the credit
stipulates otherwise or unless the credit specifically calls for a "marine bill of lading." The issuing
freight forwarder accepts carrier responsibility for performance of the entire contract of
carriage and liability for loss or damage wherever and however it occurs.
• As a rule, multimodal transport documents are not negotiable instruments.
Air Transport Document (Air Waybill)
• Definition
• An air waybill is a non-negotiable transport document covering transport of cargo from airport
to airport.
• Key Elements
• The air waybill contains the following elements:
1. Name of carrier with a signature identified as that of carrier or named agent for or on behalf of the
carrier
2. An indication that the goods have been accepted for carriage. Also, the date of issuance or date of
loading
3. An indication of the actual date of dispatch if required by the documentary credit, or, if the actual
date of dispatch is not required by the credit, the issuance date of the document is deemed to be the
date of shipment
4. An indication of the airport of departure and airport of destination
5. Appears on its face to be the original for consignor/shipper regardless of wording in the documentary
credit stipulating a full set of originals
source or document
• Information contained in the "for carrier use only" box concerning flight number and date are
not considered to be the actual flight number and date.
• Since air waybills are issued in three originals—one for the issuing carrier, one for the consignee
(buyer), and one for the shipper (seller)—the documentary credit should not require
presentation in more than one original. Nor should it call for a "full set of original air waybills."
• The air waybill is not a negotiable document. It indicates only acceptance of goods for carriage.
• The air waybill must name a consignee (who can be the buyer), and it should not be required to
be issued "to order" and/or "to be endorsed." Since it is not negotiable, and it does not evidence
title to the goods, in order to maintain some control of goods not paid for by cash in advance,
sellers often consign air shipments to their sales agents, or freight forwarders' agents in the
buyer's country.
• The air waybill should not be required to indicate an "actual flight date" since IATA regulations
specify that reservations requested by the shipper shall not be inserted under "Flight/Date."
Road, Rail or Inland Waterway Transport Documents
• Definition
• Road, rail, or inland waterway bills of lading are transport documents covering transport of
cargo from named points via road, rail or inland waterway modes of transport.
• Key Elements
• In documentary credit transactions road, rail, or inland waterway bills of lading contain the
following elements:
1. Name of carrier with a signature or authentication identified as that of carrier or named agent for or
on behalf of the carrier and/or a reception stamp or other mark noting receipt by the carrier, or named
agent for or on behalf of the carrier
2. An indication that the goods have been accepted for shipment, dispatch or carriage. Also, the date of
issuance or date of shipment
3. An indication of the place of shipment and place of destination as specified in the credit
• In road, rail, or inland waterway transport documents the date of issuance is considered the
date of shipment unless there is a reception stamp, in which case that date is deemed to be the
date of shipment.
• Unless otherwise stipulated in the documentary credit, banks will accept transport document(s)
as presented as a "full set."
• Unless otherwise stipulated in the documentary credit, banks will accept road, rail, or inland
waterway transport documents as originals whether marked as such or not.
Courier Receipt
• Definition
• A courier receipt is a document issued by a courier or expedited delivery service evidencing

receipt of goods for delivery to a named consignee.
• Key Elements
• In documentary credit transactions courier receipts should include the following elements:
1. Appears on its face to name the issuer

2. Appears on its face to be stamped, signed, or authenticated by the service
3. Name and address of the shipper (seller)
4. Name and address of the consignee (buyer)
5. The date of pick-up or receipt of the goods by the service
• Unless the documentary credit names a specific courier or expedited delivery service, banks will
accept a document issued by any courier or service.
Post Receipt
• Definition
• A post receipt is a document issued by the postal service of a country evidencing receipt of
goods for delivery to a named consignee.
• Key Elements
• In documentary credit transactions postal receipts should include the following elements:
1. Appears on its face to be stamped or authenticated by the postal service
2. The date of pick-up or receipt of the goods by the postal service
3. Name and address of the shipper (seller)
4. Name and address of the consignee (buyer)
Insurance Document (or Certificate)
• Definition
• A document indicating the type and amount of insurance coverage in force on a particular
shipment. Used to assure the consignee that insurance is provided to cover loss of or damage to
cargo while in transit.
• Key Elements
• In documentary credit transactions the insurance document includes the following elements:
1. Appears on its face to be issued and signed by an insurance carrier, underwriter or agent for same
2. Covers the risks specified in the documentary credit
3. Indication that the cover is effective at the latest from the date of loading of the goods on board a
transport vessel or the taking in charge of the goods by the carrier, as indicated by the transport
document (bill of lading, etc.)
4. Specifies coverage for at least 110 percent of either: (a) the CIF or CIP value of the shipment, if such
can be determined from the various documents on their face, otherwise, (b) the amount of the
payment, acceptance or negotiation specified in the documentary credit, or (c) the gross amount of the
commercial invoice
5. Is presented as the sole original, or if issued in more than one original, all the originals
6 . The insurance currency should be consistent with the currency of the documentary credit
• Documentary credit transactions indicating CIF (Cost Insurance Freight) or CIP (Carriage and
Insurance Paid) pricing should list an insurance document in their required documentation.
• "Cover notes" issued by insurance brokers (as opposed to insurance companies, underwriters,
or their agents) are not accepted in letter of credit transactions unless authorized specifically by
the credit.
• In Case of Loss or Shortfall
• The consignee should always note on the delivery document any damage or shortfall prior to
signing for receipt of the goods. The consignee has the responsibility to make reasonable efforts
to minimize loss. This includes steps to prevent further damage to the shipment. Expenses
incurred in such efforts are almost universally collectible under the insurance policy. Prompt
notice of loss is essential.
• Copies of documents necessary to support an insurance claim include the insurance policy or
certificate, bill of lading, invoice, packing list, and a survey report (usually prepared by a claims
agent).
Certificate of Origin
• Definition
• A document issued by an authority, as stated in the documentary credit, stating the country of
origin of goods.
• Key Elements
• In documentary credit transactions a certificate of origin should include the following elements:
1. Key details (typically consignor, consignee, and description of goods) regarding the shipment. Also,
such details to be in conformity with other documents (e.g., documentary credit, commercial invoice)
2. A statement of origin of the goods
3. The name, signature and/or stamp or seal of the certifying authority
• The certificate of origin is typically required by the buyer's (importer's) country as a requirement
for import processing. If you are the buyer (importer) and your country requires such
documentation make sure that you specify in the documentary credit the documentation (in
form and content) as specified by your country's customs authority.
• A certificate or origin can be the key document required for obtaining special (reduced) tariff
rates for imports from countries listed as beneficiaries to programs such as the GSP (Generalized
Systems of Preferences). In such a case specific forms (such as the Certificate of Origin Form A—
for GSP certification) must be used.
• Buyers should avoid the use of such terms as "first class," "well-known," "qualified,"
"independent," "official," "competent," or "local" when referring to the certifying authority. It is
preferable to specifically name the required certifying authority.
• Use of vague terminology (as above) will result in the bank's acceptance of any relevant
document that appears "on its face" to be in compliance with the documentary credit, so long as
it was not issued (signed) by the beneficiary (seller).
• In certain countries the certificate of origin is prepared by the seller (beneficiary to the
documentary credit) on a standard form and then certified (with a signature, stamp or seal) by
the certifying authority.
• Certifying authorities most often used are city and regional chambers of commerce and
chambers of commerce and industry.
NAFTA Certificate of Origin
• Definition
• The NAFTA (North American Free Trade Agreement) Certificate of Origin is a document prepared
by an exporter attesting that the country of origin of goods exported to one of the NAFTA
countries is from Canada, the United States, or Mexico.
• Key Elements
• A NAFTA Certificate of Origin includes the following elements:
1. Name and address of exporter
2. Blanket period of shipment (for multiple shipments of identical goods for a specified period of up to
one year)
3. Name and address of importer
4. Name and address of producer
5. Description of goods
6. Harmonized System tariff classification number up to six digits
7. Preference criteria (one of six criteria of rules of origin of the goods)
8. Indication of whether the exporter is the producer of the goods

9. Regional Value Content indication
10. Country of origin of goods
11. Exporter company name, date and authorized signature
• The NAFTA Certificate of Origin is the key document required for obtaining special (reduced)
tariff rates for imports from countries listed as beneficiaries of the North American Free Trade
Agreement
Inspection Certificate
• Definition
• A document issued by an authority, as stated in the documentary credit, indicating that goods
have been inspected (typically according to a set of industry, customer, government, or carrier
specifications) prior to shipment and the results of the inspection.
• Inspection certificates are generally obtained from neutral testing organizations (e.g., a
government entity or independent service company).
• Key Elements
• In documentary credit transactions an inspection certificate should include the following

elements:
1. Key details (typically consignor, consignee, and description of goods) regarding the shipment. Also,
such details to be in conformity with other documents (e.g., documentary credit, commercial invoice)
2. Date of the inspection
3. Statement of sampling methodology
4. Statement of the results of the inspection
5. The name, signature and/or stamp or seal of the inspecting entity
• In the case of certain countries and certain commodities the inspection certificate must be
issued by an appropriate government entity.
• Buyers should avoid the use of such terms as "first class," "well-known," "qualified,"
"independent," "official," "competent," or "local" when referring to an acceptable inspection
authority. It is preferable to agree beforehand as to a specific inspection organization or entity
and for the buyer to name the required certifying organization or entity in the documentary
credit.
• Use of vague terminology (as above) will result in the bank's acceptance of any relevant
document that appears "on its face" to be in compliance with the documentary credit, so long as
it was not issued by the beneficiary (seller).
Export License
• Definition
• An export license is a document prepared by a government authority of a nation granting the

right to export a specific quantity of a commodity to a specified country.
• This document is often required for the exportation of certain natural resources, national
treasures, drugs, strategic commodities, and arms and armaments.
• Key Elements
• The export license of each country will have its own form and content. Certain elements are
likely to be included in all export licenses:
3. Date of issuance
4. Validity date
5. Description of goods covered by license
6. Name of country of origin
7. Name of country of ultimate destination
• Some countries require export licenses for virtually all commodities and products. The license is
a means of control and taxation. In some cases the lack of an export license can be cited as a
reason why goods cannot be shipped, even though payment has been made. Buyers should be
especially careful about buying sensitive goods from countries with a demonstrated lack of rule
by law.
• The export license is typically the responsibility of the seller. However, if the buyer is dealing in
sensitive goods, he should research the need for an export license beforehand. Failure to secure
such a license can delay or prevent shipment and jeopardize the validity of a documentary
credit.
Consular Invoice
• Definition
• A consular invoice is an invoice covering a shipment of goods certified (usually in triplicate) in

the country of export by a local consul of the country for which the merchandise is destined.
• Key Elements
• The consular invoice of each country will have its own form and content. Certain elements are
likely to be included in all consular invoices:
3. Date of issuance
4. Country of origin of the goods shipped
5. Country of final destination of the goods
• This invoice is used by customs officials of the country of entry to verify the value, quantity,
country of origin, and nature of the merchandise.
• Some countries require that the consular invoice be prepared on their own forms, which are
usually supplied by the consul of that country. Some require that they be in the language of
their country and officially be certified by that country's consulate in the state or country of
export.
• In some cases the certification and legalization of these documents can take considerable time,
and this should be considered by both buyer and seller when such documents are required.
Shipper's Export Declaration (SED)
• Definition
• An export declaration is a document specifying the particulars of an export transaction.
• Note that different countries have different names for the export declaration. In the USA it is
called the SED or Shipper's Export Declaration.
• Issued By
• The export declaration is issued by the exporter/seller/consignor and presented to the export
authority of the country of export. In some cases, it must be certified by the export authority.
• Key Elements
• Each country has its own export declaration form. The shipper's export declaration typically
includes the following elements:
3. Date of issuance
5. Country of origin of the goods shipped

6. Country of final destination of the goods
9. Statement that the goods will not be diverted to another country contrary to the laws of the
exporting country
• The shipper's export declaration is used by a nation's customs authorities to control exports and
compile trade statistics. The SED is rarely a requirement of the importer, but rather is required
of the exporter by the export authorities.
Regional Trade Pact Import/Export Declaration
• Definition
• A standardized export/import document used in common by members of a regional trade group

containing compliance, administrative and statistical information.
• Issued By
• This document is typically issued by the exporter/seller.
• Key Elements
• The typical trade pact import/export declaration contains the following elements:
1. Name and address of exporter/seller/consignor
2. Name and address of importer/buyer/consignee
3. Description and value of the goods
4. A statement of origin of the goods
5. Country of destination of the goods
6. Carrier and means of transport
7. Other compliance, administrative and statistical information
• This document is used as an export declaration when exporting from any trade pact member
country to a non-member country and as both an import and export declaration when
transporting goods across country borders within the trade group.
• Because of its standardized format, this document is often linked to a computer system for the
electronic transfer of information to export and import authorities within the trade group.
• The EU (European Union) Sad (Single Administrative Document)

• This document is a prime example of a regional trade pact import/export declaration. It was
established by the European Community Council in 1988 with the goal of standardizing customs
documentation and simplifying international transactions.
• This particular document is used as an import/export declaration and also for the declaration of
goods in transit within EU and EFTA (European Free Trade Area) countries. It may be submitted
by computer directly to the customs authorities in all the 15 EU member nations.
• Countries outside of the EU have shown interest in using the SAD and some have already
adopted the format for their import documentation (e.g., Bulgaria).
Packing List
• Definition
• A packing list is a document prepared by the shipper listing the kinds and quantities of
merchandise in a particular shipment.
• A copy of the packing list is often attached to the shipment itself and another copy sent directly
to the consignee to assist in checking the shipment when received. Also called a bill of parcels.
• Key Elements
• The packing list should include the following elements:
3. Date of issuance
4. Invoice number
5. Order or contract number
8. Quantity and description of contents of each package, carton, crate or container
9. Any other information as required in the documentary credit (e.g., country of origin)
• The packing list is a more detailed version of the commercial invoice but without price
information. The type of each container is identified, as well as its individual weight and
measurements. The packing list is attached to the outside of its respective container in a
waterproof envelope marked "packing list enclosed," and is immediately available to authorities
in both the countries of export and import.
• Although not required in some transactions, it is required by some countries and some buyers.
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Chapter 11:

Documentary Credits, Part 2: Settlement (Making Payment)

• There are three primary means of settlement:

(1) settlement by payment,

(2) settlement by acceptance, and

(3) settlement by negotiation.

• In settlement by acceptance the beneficiary presents the required documentation package to

3. The advising/confirming bank:

(b) pays the seller.

5. The issuing bank:

6. Sends the document package by mail or courier to the buyer.

7. The buyer pays or reimburses the issuing bank as previously agreed.

3. The advising/confirming bank:

(b) accepts the draft and returns it to the seller.

5. The issuing bank:

6. Sends the document package by mail or courier to the buyer.

3. The advising/confirming bank:

(b) pays the seller.

6. Sends the document package by mail or courier to the buyer.

Revocable vs. Irrevocable Documentary Credits

• Each has a distinct advantage for buyers and sellers.

Confirmed vs. Unconfirmed Documentary Credits

(1) in a foreign country,

(2) beholden to the buyer,

(3) small and unknown to the seller, or

Unconfirmed (or Advised) Documentary Credit

• In dealing with a readily identifiable issuing bank in a developed country, an unconfirmed

• Confirmed Documentary Credit

• Confirmed Documentary Credit

Irrevocable Straight Documentary Credit

Irrevocable Negotiation Documentary Credit

• An irrevocable negotiation documentary credit conveys a commitment by the issuing bank to

• Key Wording/Engagement Clause

Irrevocable Unconfirmed Documentary Credit

• An irrevocable unconfirmed documentary credit conveys a commitment by the issuing bank to

• Key Wording/Engagement Clause

Irrevocable Confirmed Documentary Credit

• Key Wording/Engagement Clause

• Confirmation instructions: With, Confirm, or Confirmed

Chapter 13: Documentary Credits, Part 4: Special

Red Clause Credit

• Exporters may be asked to provide a standby documentary credit as a requirement of working

• Fulfillment by contractors and subcontractors

• Securing payment for goods or services delivered by third parties

Red Clause Credit

• EXAMPLE: A furniture manufacturer in Taiwan (the buyer/importer) through an issuing bank in

• A transferable credit is used by a "middleman" who acts as an intermediary between a buyer

• Transferable credits can be transferred in whole or in part.

• Partial Quantities/Multiple Suppliers

• Permitted Changes to the Credit

• Amendments to a Transferable Credit

• Amendments to a Transferable Credit

1. Retainment of rights on amendments

2. Partial waiver of rights on amendments

3. Waiver of rights on amendments

• Transferable Credit Issuance Procedure

5. Advising bank notifies intermediary of documentary credit.

6. Intermediary orders transfer of documentary credit to seller (second beneficiary).

7. Advising bank transfers credit in care of transferring (seller's) bank.

8. Transferring bank notifies seller (second beneficiary) of documentary credit.