Guide to Trade Finance Documentary Services · The Uniform Rules for Collection (URC) are an...

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Ulster Bank Trade Finance Basic Definitions The collection service provided by a bank is a means whereby a creditor (usually an exporter) in one country obtains payment from a debtor (generally an importer) in another country. Standard international rules governing the role and responsibilities of banks in collections have been established by the International Chamber of Commerce. These are known as the Uniform Rules for Collection (ICC publication URC 522). The URC are internationally recognised and have been adopted by most banks world-wide. Two types of documentation may be handled by the bank when it arranges a collection on behalf of a customer: Financial documents A Bill of Exchange. Commercial documents A document of title such as a Bill of Lading; invoices, insurance policy and possibly other documents such as certificate of origin. When commercial and financial documents are present, the collection is known as a Documentary Collection. Whereas, a Clean Collection consists only of financial documents. Ulster Bank’s Collection Service can be divided into two types: Outward Collections The bank undertakes to obtain payment of financial and/or commercial documentation from an overseas party on behalf of an exporter. The exporter may or may not be a customer of Ulster Bank. Inward Collections The bank assists a correspondent bank abroad to obtain payment of a Bill of Exchange or cheque from an Irish importer on behalf of a foreign supplier. It is noteworthy that the debtor may or may not be a customer of Ulster Bank. The parties to a collection are as follows: The principal Either our customer, the exporter who entrusts an Outward Collection to Ulster Bank, or a foreign supplier who entrusts the collection to a bank in his country for obtaining payment from a debtor in Ireland. The Remitting Bank Where documents are sent from a bank. The Collecting Bank Usually a correspondent bank of the remitting bank or the bank specified by the principal in his instructions to the remitting bank. The Presenting Bank The bank which presents the documents to the debtor for acceptance/ payment. Often the collecting bank and the presenting bank are the same bank. The Debtor The importer. Guide to Trade Finance Documentary Services

Transcript of Guide to Trade Finance Documentary Services · The Uniform Rules for Collection (URC) are an...

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Ulster Bank Trade Finance

Basic Definitions

The collection service provided by a bank is a means whereby a creditor (usually an exporter) in onecountry obtains payment from a debtor (generally an importer) in another country.

Standard international rules governing the role and responsibilities of banks in collections have beenestablished by the International Chamber of Commerce. These are known as the Uniform Rules forCollection (ICC publication URC 522). The URC are internationally recognised and have beenadopted by most banks world-wide.

Two types of documentation may be handled by the bank when it arranges a collection on behalf ofa customer:Financial documents A Bill of Exchange.Commercial documents A document of title such as a Bill of Lading; invoices, insurance policy

and possibly other documents such as certificate of origin.

When commercial and financial documents are present, the collection is known as a DocumentaryCollection. Whereas, a Clean Collection consists only of financial documents.

Ulster Bank’s Collection Service can be divided into two types:

Outward Collections The bank undertakes to obtain payment of financial and/or commercialdocumentation from an overseas party on behalf of an exporter. Theexporter may or may not be a customer of Ulster Bank.

Inward Collections The bank assists a correspondent bank abroad to obtain payment of a Billof Exchange or cheque from an Irish importer on behalf of a foreign supplier. It is noteworthy that the debtor may or may not be a customer of Ulster Bank.

The parties to a collection are as follows:

The principal Either our customer, the exporter who entrusts an Outward Collection to Ulster Bank, or a foreign supplier who entrusts the collection to a bank in his country for obtaining payment from a debtor in Ireland.

The Remitting Bank Where documents are sent from a bank.The Collecting Bank Usually a correspondent bank of the remitting bank or the bank specified

by the principal in his instructions to the remitting bank.The Presenting Bank The bank which presents the documents to the debtor for acceptance/

payment. Often the collecting bank and the presenting bank are thesame bank.

The Debtor The importer.

Guide to Trade FinanceDocumentary Services

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The two main sources from which Ulster Bank typically receives instructions to handle Collections are:

A bank customer who is an exporter (an Outward Collection).A foreign correspondent bank acting on behalf of an exporter in its own country (an Inward

Collection).

Target Customer Profile

Collections are suitable for any customer receiving payment from overseas in the form of Bills ofExchange and documentation. The bank’s collection service is likely to be of interest to importers andexporters of goods and services. These could be small, medium or large corporates.

Ulster Bank’s collection service is available to customers and non-customers alike.

For customers with a knowledge of international trade documentation an Expedited Bill CollectionService is available. This service is a speedier method of remitting documents to the importer’s bankoverseas and is described in more detail later.

The Collection Cycle (Outward Collections)Refer to Diagram (A)

Our customer (the exporter) negotiates a commercial contract with a foreign buyer (the importer) andships his goods.

The exporter submits his collection together with financial documents and commercial documents toUlster Bank

Although there is no legal obligation to scrutinise any documents, the bank undertakes a prima faciecheck of documents to ensure that everything appears to be in order.

The Remitting Bank (i.e. Ulster Bank) forwards documents to the Collecting Bank. The Remitting Bankshould utilise the Collecting Bank specified by the Principal (i.e. the exporter). Only if no CollectingBank is nominated should the Remitting Bank select a correspondent bank of its choice.

Upon receipt, the Collecting Bank acts in accordance with the instructions of the Remitting Bank as setout in the Collection. When handling a Documentary Collection, the Collecting Bank arranges forthe importer to inspect the documents. Under no circumstances should documents be releasedwithout payment or an agreed acceptance. If the importer considers the documents are in order, theCollecting Bank releases them against payment or acceptance of the Bill.

When the Bill is paid the Collecting Bank should without delay, send the proceeds to the RemittingBank (less charges if appropriate).

The Remitting Bank then credits proceeds to the account of the exporter (again less charges ifapplicable).

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The Collection Order

Ulster Bank customers should use the Bank’s standard Collection Order BA 405 Instructions forCollection of Bills and/or Documents (see Form I). By signing the form our customer agrees notonlyto accept our terms but also:

- To be bound by the Uniform Rules for Collection- That Ulster Bank is not liable for any errors made by the Collecting Bank.

The Collection Order should contain the following information:

The name of the nominated bank to whom the collection is being sent.The name of the drawer.The name and address of the drawee.Details of the documents accompanying the collection.In the case of a Documentary Collection containing a Bill of Exchange, whether the documents should

be released against payment (D/P) or against acceptance (D/A). In the absence of any suchinstruction, the Collecting Bank should assume that documents should be released againstpayment (D/P).

The date, tenor and value of the collection.How the charges should be borne, by the principal, the drawee or both.Whether a Bill should be protested in the event of a non-acceptance or non-payment.Special instructions, e.g. how the goods should be protected (warehousing and insurance). In cases

where the documents are not delivered to the buyer immediately on the goods arriving at theirdestination - provided that prior approval from the Collecting Bank has agreed to help in thisrespect.

Advantages of a D/P Collection versus a D/A Collection

An exporter should always specify in his instructions how the importer should settle a Bill of Exchange.This should be in one of two ways:

1. Documents against payment (D/P): This means that the Bill is payable at sight by the importer. The Collecting Bank hands over the shipping documents only when the importer has paid the Bill.

2. Documents against acceptance (D/A):This means that the exporter is allowing credit terms to the importer. The period of credit is the“term” of the Bill. The importer/drawee is required to accept the Bill, i.e. to sign the Bill as a promiseto pay the Bill at a set date in the future. When he has signed the Bill by way of acceptance, theimporter can take the documents and clear his goods. The Bill of Exchange is then held by theCollecting Bank until its maturity and will be presented again at that time for payment by thedrawee.

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D/A terms are considerably more risky for the exporter than D/P terms:Under the D/P terms the exporter keeps control of the goods (through the Presenting Bank) until theimporter pays. If the importer cannot pay or refuses to pay, the exporter can:

Protest the Bill and take him to court (may be expensive and difficult to control from another country).Find another buyer.Arrange for sale of the goods at an auction.

In these last two instances the price may be lower but probably still better than shipping the goodsback. Sometimes the exporter will have a contact or agent in the importer’s country who can help withany arrangements. Such an agent is often referred to as a “case of needs”, i.e. someone who can becontacted in case of need by the Collecting Bank.

Under D/A terms the importer can inspect the documents and if he is satisfied, accept the Bill forpayment, take the documents and clear the goods. The exporter therefore loses control of the goods.

Under D/A Collection the exporter runs various risks:

The Importer might refuse to pay on the due date because;- he finds that the goods are not what he ordered;- he has not been able to sell the goods; or- he is prepared to try to cheat the exporter.

In these circumstances the exporter can protest the Bill and take the importer to court, but this can beexpensive.

The importer might have gone bankrupt, in which case the exporter will probably never obtain hismoney. If the importer refuses to pay, the Collecting Bank acts on the exporter’s instructions in theCollection Order. These instructions could include:

- Removing the goods from the port to a warehouse and insuring them.- Protesting the Bill through the bank’s lawyer (or notary public).

Advantages of Collections

Documentary Collections provide a method of settlement in international trade which (like DocumentaryCredits) offers a compromise between:

Payment in advance which favours the exporter who receives payment before he ships thegoods. Under this arrangement the buyer must therefore trust theexporter to send the goods which have already been paid for.

Trading on open account which favours the importer who usually pays after he receives the goods.Here the exporter must trust the buyer to pay for the goods that havebeen sent to him.

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The Uniform Rules for Collection (URC) are an internationally recognised set of rules (see the ICCpublications No 522) which are binding on all parties (Principal, Drawee, Remitting Bank andPresenting/Collection Bank) unless otherwise expressly agreed, or unless contrary to local laws. TheURC define internationally accepted procedures, responsibilities and liabilities and technical terms forCollections. This greatly reduces the practical difficulties of international trade.

By using banks as intermediaries to collect payment from the importer for goods, which the exporterhas already sent, the use of Collections reduces:

- The risks for both exporter and importer.- The delay in receipt of payment by the exporter and the receipt of goods by the importer.

Advantages for Collections for the Exporter

In the case of Documentary Collections the exporter can retain control over the goods until the buyeraccepts the Bill drawn on him (D/A) or pays the Bill (D/P). The latter of these two arrangements is ofcourse more secure for the exporter.

Our customer, the exporter, may be able to raise finance against the Collection by obtaining anadvance against the security of the Bill. Obtaining bank finance enables the exporter greaterflexibility in the payment terms he offers to his buyer overseas.

The Collecting Bank may have greater influence over the foreign debtor and might be more able toobtain payment than if trade were on open account terms.

Collections are cheaper than Documentary Credits (which nevertheless do offer a more secure meansof obtaining payment from the overseas buyer).

A Bill of Exchange, once accepted, is legally binding on the Drawee. Accepted Term Bills thereforeprovide a form of security to the exporter, whilst at the same time, allowing a period of credit to thebuyer.

Documentary Collections speed up the remittance of funds to the exporter compared with openaccount trading, for the following reasons:

The Collecting Bank is under an obligation to present documents without delay and to present anaccepted Bill for payment not later than its maturity date.

The Collecting Bank ensures that the documents are released to the buyer only on an acceptance orpayment of Bills. In normal circumstance this will encourage the importer to pay or accept the Billpromptly in order to gain access to the goods.

When payment has been received the Collecting Bank can remit the proceeds to the exporter by urgenttransfer if this is specified in the collection order

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Possible Disadvantages of Collections for the Exporter

The overseas buyer might refuse to pay or accept a Bill on presentation of the documents. Theexporter will therefore have to decided whether to abandon the merchandise, arrange warehousingor re-ship the goods.

Remittance of documents and collection times can be relatively slow (i.e. there may be a time lapsedue to delay in the importer viewing the documents and providing the necessary paymentinstructions) and an exporter may have to wait for the resultant funds. To add to the delay, it iscommon practice in some countries to defer presentation of documents for payment or acceptanceuntil the goods have arrived.

In the event of delays or difficulties (for example having to warehouse goods at the port of destinationuntil the buyer takes delivery) the costs are borne by the exporter.

The use of term Bills enables the exporter to offer credit terms to the importer, (i.e. provides a buyercredit mechanism to induce a sale). Although the exporter may be able to raise finance against theCollection from his own bank, this will nevertheless be at a cost to himself, unless he factors thisexpense into the value of the commercial sales contract with his buyer.

Any expenses incurred by a Collecting Bank in connection with protesting a Bill are charges to theexporter. He should therefore instruct the bank in his Collection Order to protest only if the likelybenefits from the protest justify the costs (i.e. value of goods versus alternative sale value, solvency

of buyer, etc).

Our customer, if an exporter, deals direct with Trade Finance Section Belfast who can provide expertadvice. A Customer Helpline is available as follows

The Group’s world-wide network of correspondent banks enables us to ensure that documents areprocessed and funds remitted promptly.

Jill ColhounTrade FinanceUlster Bank LtdDanesfort, Stranmillis RoadBelfast BT9 5UB

Telephone (NI) (028) 90762372Telephone (RI) (048) 90762372Facsimile (028/048) 90762370

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Advantages and Disadvantages of Collections for the Importer

Advantages

The use of Terms Bills provides the buyer with a period of credit from the exporter.The importer can inspect the documents (but not the goods themselves) before accepting a Bill (D/A) or

paying a Bill of Exchange (D/P).In the case of Clean Collections the buyer can take possession of the goods before paying for them.It is possible to defer payment/acceptance, subject to the exporter’s approval, until arrival of the goods.Collections are cheaper and simpler for the importer than Documentary Credits. This is because the

Collecting Bank does not have any financial interest or risk commitment, so there are fewerformalities and costs.

An importer does not require a credit limit from his bank if he imports on collection terms, unlike othermethods of international trade settlement where a suitable credit facility is required, i.e.Documentary Credits.

Disadvantages

Legal action might be taken against the importer if he dishonours an accepted Bill of Exchangeregardless of the condition of the goods. Refusal to accept or pay a Bill could also lead to protest fornon-acceptance or non-payment which might seriously damage the importer’s financial reputation andthe relationship with the exporter.

Expedited Bills Service

Ulster Bank has developed an alternative method to the standard process for handling documents,called the Expedited Bill Service. This facility is designed to enable customers to remit DocumentaryCollections direct to the bank abroad from the company premises, thereby reducing document timedelay. The Expedited Bills Service is normally recommended for customers who undertake OutwardBill Collections on a regular basis and who have experience of documentary procedures.

Our customer, the exporter, is issued with a stock of Ulster Bank headed forms with which to send thedocuments directly to their importer’s bank. In addition, a schedule of the documentation is then sent toour Outward Bills Department in Belfast.

Outward Bills Department takes over the handling of the Collection after remittance of the documents.This includes collection of the proceeds for a much lower charge than the standard service.

The features and benefits of our Expedited Bills Service are:

Cost containment.Well established and publicised service standards.Speedier transmission of documents that can reduce collection times by up to 3 days, thereby avoiding

payment of demurrage charges.Prompt transmission of funds through the banking network, to your existing bank accounts.The Expedited Collection Service’s tariff is cheaper than the Standard Outward Bills Service.

Considerations when using Documentary Credits (Refer Diagram B)

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Definitions

A Documentary Credit, also known as a Letter of Credit, Documentary Letter of Credit or D/C, is awritten undertaking by a bank on behalf of a buyer/importer to pay the seller an amount of money withina specified time, provided the seller presents documents strictly in accordance with the terms laid downin the Documentary Credit.

There are two basic types of D/C1. Irrevocable D/C’s2. Revocable D/C’s

Revocable D/C’s are extremely rare because they do not provide a satisfactory guarantee of paymentfor the exporter.

An Irrevocable D/C once used, cannot be amended or cancelled without the prior agreement of theBeneficiary. An Irrevocable D/C therefore gives greater security to the exporter because the IssuingBank and Confirming Bank continue to guarantee payment to the exporter even if the importer changeshis mind.

In accordance with Article 6 of UCP 500 a D/C will be deemed Irrevocable unless stated as beingRevocable.An Irrevocable D/C can be a very effective means of settlement with overseas customer, offering extrasecurity for both parties:For the seller/exporter - who receives a written undertaking from the buyer’s bank that provided

documents are submitted strictly in accordance with the D/C he will be paid.For the buyer/importer - who is able to stipulate the exact documentation that the seller must provide in

order to be paid. In addition, the D/C includes an expiry date and a latest date for shipment toprompt the seller to despatch both goods and documents expeditiously.

The basic steps for using a D/C are described below (refer to enclosed Application to open adocumentary credit Form 2).

1. The importer/buyer, known as the Applicant, negotiates a sales contract with the exporter providing for payment by D/C.2. The importer requests that his bank issues a D/C in favour of the exporter, specifying details of the documents required together with all terms and conditions of the D/C.3. The buyer’s bank known as the Issuing or Opening Bank, issues the D/C by asking a bank in the exporter’s country to advise the D/C to the exporter. This bank, which will generally be the exporter’s own bank, is known as the Advising Bank.4. The Advising Bank informs the exporter of all the terms and documents required and authenticates the genuineness of the D/C. The Advising Bank may agree to handle the D/C without giving any financial commitment itself to pay the exporter. On the other hand, the Issuing Bank may request the Advising Bank to add its confirmation to the D/C which means that the latter bank adds its own conditional guarantee of payment to the guarantee already provided by the Issuing Bank. In this case, the exporter’s bank is known as the Confirming Bank.5. The exporter/supplier, who is also known as the Beneficiary of the D/C, is informed by the Advising/Confirming Bank that a D/C has been opened in his favour with all the terms and documents required in order to receive payment.

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6. Once the exporter has shipped the goods, he submits the documents to the Advising/Confirming Bank, or occasionally to a Bank known as a nominated Bank which has agreed to negotiate the D/C on his behalf, to receive payment. The bank checks the documents received very carefully to ensure that they are exactly as stipulated in the D/C. In general, the documents will include:

Transport documents, such as full set of Bills of LadingCopies of the InvoiceA certificate of insurance (where the insurance is paid by the exporter)A Bill of Exchange drawn on the Issuing Bank or the Advising Bank

7. If the documents are found to be in order, the exporter will be able to obtain payment.8. The Advising/Confirming or Nominated Bank, then forwards the documents to the Issuing Bank and receives payment either at sight or term, providing documents are found to be in order by the Issuing Bank.9. Finally, the Issuing Bank makes the documents available to the importer and receives reimbursement from the importer.

Target Customers

Ulster Bank has the capacity to handle all aspects of D/C’s. The Bank issues D/C’s on behalf ofimporters. We also receive D/C’s from Correspondent Banks and other banks which have been infavour of a Beneficiary which may or may not be a customer of Ulster Bank.

Ulster Bank’s D/C service is therefore appropriate for importers and exporters as well as traders actingas middlemen in international trade.

Advantages of D/C’s for the Importer

Importer can obtain help and advice from the Issuing Bank in calling for appropriate documents to bepresented under the D/C.

Importer can insist on shipment of goods within a reasonable period of time by fixing a last date forshipment and presentation of documents.

Payment will not have to be made unless documents are presented in accordance with D/C terms andconditions.

Importer may be able to obtain a longer period of credit or a better price under the commercial contractwhen using a D/C rather than with a less secure method of payment for the exporter.

Depending upon the contract between the importer and exporter, it may be possible for the buyer to passon all or some of the costs to the exporter. Again this depends on the bargaining strength of the twoparties.

If the importer can arrange with his bank to issue a D/C it can help to increase his credibility in the eyesof the exporter.

Banks are concerned only with documents, not goods, and payment will be forthcoming againstcorrectly tendered documents, irrespective of any damage which might occur to the goodsthemselves in transit.

Payment can be arranged through a bank in the exporter’s own country.If the exporter does not know the bank which has issued the D/C or has any possible doubts about its

ability to pay, then he can arrange for the D/C to be confirmed by his own bank. Confirmation of theD/C also overcomes any possible country risk.

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UCP provides a set of internationally recognised rules and procedures, which reduce the risk ofunpleasant surprises.

D/C’s can be particularly useful in the early days of a trading relationship, since the exporter may bereluctant to release the goods until he is confident of being paid.

Possible Disadvantages of D/C’s for the Importer

Banks deal with documents, not goods. Therefore payment under the D/C is made provided the exporterpresents the stipulated documents in accordance with the terms of the D/C, regardless of thecondition of the goods themselves.

The importer will require a credit limit to be approved by the Bank before issuing an Import D/C.This may restrict the other credit facilities available to the importer.

Usually it is the importer who ends up paying the D/C’s costs. However, the importer might be able topersuade the exporter to pay some or all of these costs.

Ways of Overcoming Disadvantages

The importer should obtain a status report on the foreign supplier’s technical capacity to produce thegoods to be ordered.

The documents requested under the D/C might include a Third Party Certificate of Inspection. Thisprovides the importer with additional comfort that the goods shipped are as specified and in goodcondition prior to shipment.

The D/C could specify that a particular shipping company known and trusted by the importer shouldtransport the goods.

Confirmed Irrevocable D/C’s

The exporter may not know the foreign bank, which has issued the D/C. Similarly, the exporter mightbe concerned that exchange control difficulties or political risks or even the liquidation of the IssuingBank might mean that the exporter will not receive payment under the D/C. The exporter may thereforeprefer to seek additional security in the form of a confirmation (i.e. additional guarantee) from a bank inthe exporter’s country, preferably the exporter’s own bank.When an Advising Bank in the exporter’s own country confirms a D/C the instrument is known as aConfirmed Irrevocable D/C.With a Confirmed Irrevocable D/C the supplier is assured of payment provided he complies with theterms of the D/C since he has conditional guarantees from two banks, one of which is in the supplier’sown country.

Deferred Payment D/C’s

Normally the terms of a D/C include an instruction to the exporter/Beneficiary to draw a Bill ofExchange and the Issuing Bank guarantees that such Bill will be honoured provided all other terms ofthe D/C are fulfilled.

However, in a Deferred Payment D/C there is no need for the Exporter to draw a Bill of Exchange.Rather, the Issuing Bank simply guarantees that payment will be made at a fixed determinable future

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date (for example 30 or 60 days after the date of the Bill of Lading) provided the conditions of the D/Care met.

Uniform Customs & Practice for Documentary CreditsIn order to function smoothly D/C’s require co-operation between banks in different countries.Internationally agreed standard procedures have therefore been drawn up by the International Chamberof Commerce, known as the Uniform Customs & Practice for Documentary Credits, or UCP 500.Most Countries and territories subscribe to UCP 500 either on a collective country basis or on anindividual bank notification basis.When a D/C is opened the fact that it is subject to UCP is included in the instructions. D/C’s thereforeprovide a strong degree of security and confidence in international trade since the rules areinternationally recognised.It is, however, noteworthy that UCP 500 is not legally binding. If legal proceedings arise national lawtakes precedence although the UCP rules can be taken into consideration in arriving at a judgement.

Payment Terms of D/C’sAll D/C’s must clearly indicate their payment terms. These include:- Immediate payment of a Sight Bill of Exchange drawn on the Confirming Bank- Acceptance of a Term Bill drawn on the Confirming Bank. Such a Bill can subsequently be

discounted- Negotiation of a Sight or Term Bill of Exchange drawn on the Issuing Bank- Sight Payment or Deferred Payment against documents only without Bill of Exchange.The Advising/Confirming Bank checks the documents presented by the exporter and if everything is inorder it will pay, accept or negotiate documents according to the terms of the D/C. TheAdvising/Confirming Bank then forwards the documents to the Issuing Bank where they are checkedagain.When the Advising Bank does not add its confirmation, it is not obliged to effect payment, even thoughthe documents presented by the Beneficiary comply with the D/C, until such time as it has receivedfunds from the Issuing Bank to cover the payment due. The same guidelines apply to a Term D/C wherea Bill of Exchange is drawn on the Issuing Bank. Should Term Bills be drawn on the Advising Bankthere is no obligation for these to be accepted.

Discrepant Documents (Included for Information Purposes Only)

If there are any discrepancies with the documents, they should be corrected, if possible, and thedocuments re-presented within the time limit specified in the D/C. Alternatively, the exporter shouldtime permitting, ask the importer to arrange for the terms of the D/C to be modified.

The Beneficiary may instruct the Advising, Confirming or Nominated Bank to telex out for permissionto pay, notwithstanding discrepancies forward documents ‘in trust’ or occasionally request paymentagainst provision of an indemnity.

Typical discrepancies found by a bank in checking the documents are as follows: -

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The D/C amount is exceeded.The D/C has expired.The Bill of Exchange has been drawn on the wrong party.The amount of the invoice is less than the amount of the D/C where partial shipments are not allowed.Late shipment.The documents have been presented after the period stipulated in the D/C following shipment.The Bill of Lading or other transport document is not ‘clean’ but is ‘claused’ which means that it bears a

clause stating that the goods or packaging are in defective condition.The Bill of Lading is a charter party bill of lading. This is not permissible unless expressly authorised in

the D/C.The Bill of Lading is not marked ‘freight paid’ when the D/C calls for CIF or CFR shipment terms.The goods are being shipped between ports different from those stated in the D/C.The insurance risks covered are not those required by the D/C.The insurance document presented is not of the type required by the D/C (e.g. an insurance cover note or

certificate might be presented when the D/C calls for an insurance policy).The shipment is under insured.The amount insured is in a currency different from the currency stated in the D/C.There is no evidence that the goods have been shipped on board (where the D/C calls for such evidence)The Bill of Lading states that the goods have been shipped on deck, when this is not permitted.

Documents are also checked for consistency with each other. Typical inconsistencies might be;The description of the goods on the invoice differs from the description of the goods in the D/C.The weight of the goods differs from one document to another.The documents cannot be linked by marks or numbers.

Exporters should be advised to take particular care with regard to D/C’s emanating from Nigeria inview of the high incidence of fraudulent D/C’s

Import Documentary Credits

Our customer, the importer, arrange a D/C credit limit with Ulster Bank for an amount and durationto cover the company’s Import D/C requirements. This is necessary because Ulster Bank isconditionally guaranteeing payment on behalf of the importer.

Once the limit is approved our customer the importer, can request Ulster Bank issues individual D/C’sby using the Bank’s standard Application to open a Documentary Credit BA415 (Form 2).

D/C’s may be requested manually by completing the above mentioned standard form, D/C’s can alsobe initiated on a floppy disc, available on request.

Consideration for the Bank when Issuing D/C’s Risk

When Ulster Bank issues a D/C it guarantees payment provided documents are presented in accordancewith the terms of the D/C. The Issuing Bank is obliged to honour the D/C if its terms have been fulfilledirrespective of whether the Applicant has funds in his account. As a result, we treat a D/C in much thesame way as any other credit facility and it is therefore essential to obtain approval for a suitable creditlimit before issuing a D/C.

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As with any credit facility, the Bank’s prime considerations are the creditworthiness and integrity of thecustomer. However, it is significant that the underlying goods can be used as a form of “security”provided correct formalities are observed. In signing the Bank’s standard application form for a D/C,our customer the importer, gives a pledge to Ulster Bank giving us rights over the documents andtherefore the goods themselves. If the importer fails to meet his obligations to the Bank, then UlsterBank has the right to sell the goods.

The following additional points should therefore be considered:

The nature of the goods, i.e. would they be readily saleable if the Bank had to sell them in the event ofthe importer’s default?The Beneficiary should be well known or a good status report should be held regarding his reliabilityand ability to supply the goods.The goods should be properly insured. If the D/C calls for an insurance document (which would bethe case if the sales contract is CIF) then the insurance cover can be checked. If the D/C does not callfor an insurance document (as would be the case with a FOB contract) then the Bank should satisfyitself that the Applicant can effect the necessary insurance.If Bills of Lading are used for the shipment then the Bank can insist on a complete set of clean,shipped on board and blank endorsed Bills of Lading.If Air Waybills are called for under the D/C, then the Issuing Bank should decide whether it wishesto be named as consignee in order to retain control of the goods. Air Waybills are not documents oftitle. However, the Bank can obtain control over the goods by arranging for them to be consigned tothe Bank instead of the importer.

Documentation for Import D/C’s

Our customer, the importer, should complete the standard bank form, BA415. This document providesimportant information as to the terms and conditions of the Import D/C service provided by Ulster Bank.

This application form in addition to providing the Issuing Bank with sufficient information to issue theD/C, incorporates a Letter of Pledge. This provides the Bank with an immediate right of sale overthe underlying goods without first making demands on the customer.

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Transferable Documentary Credits (Refer Diagram C)

A Transferable D/C is one which can be transferred in whole or in part by the original Beneficiary toone or more second Beneficiaries in either the same country or different countries. This structure isnormally used when the First Beneficiary does not supply all the goods himself but acts as a middlemanbetween the supplier(s) and the buyer.

The First Beneficiary might even be an agent in one country for an overseas buyer, responsible forplacing a number of purchase orders for the buyer. In these circumstances the D/C is usually for a largeamount and the First Beneficiary is responsible for distributing the portions of the D/C to varioussuppliers/Second Beneficiaries.

The middleman would ask the buyer to arrange a Transferable D/C so that the ability to presentdocuments for payment/acceptance/negotiation can be transferred to the supplier(s). Thus the rights andobligations of the First Beneficiary under the Transferable D/C are extended to a Second Beneficiary,without any need for a second D/C to be issued.

Procedure for a Transferable D/C

The steps involved in a Transferable D/C are described below and shown in Diagram (C).

1. At the request of the middleman, the importer/buyer instructs his bank to issue a Transferable Credit in favour of the middleman.

2. The middleman/First Beneficiary, known as the Transferor, asks the Advising Bank to transferthe D/C to one or more supplier(s), the Second Beneficiary (known as the Transferee). Themiddleman instructs the Advising Bank to change the following details of the D/C before it issent to the supplier:- the middleman’s name and address are substituted for the importer’s details- the amount is reduced- the expiry date will be earlier- the period for shipment will be reduced.

3. The goods are shipped directly to the Importer/Applicant by the Second Beneficiary and nevercome into the physical possession of the middleman.

4. The Second Beneficiary presents his documents directly or through a Presenting Bank to the Advising Bank. The invoice will be for the amount advised under the transferred portion of theCredit.

5. On receipt of the documents the Advising Bank contacts the First Beneficiary who provides theAdvising Bank with his own invoice for the full amount of the D/C. The Advising Banksubstitutes this invoice for the Second Beneficiary’s invoice.

The Advising Bank presents the documents to the Issuing Bank for payment. The Issuing Bank thenrequests funds from the Applicant/Importer.

7. On receipt of funds the Advising Bank pays the amount due to the Second Beneficiary and theremainder goes to the middleman as his profit.

Should be irrevocable and must be specifically requested by the Applicant. A Transferable D/C cannotbe arranged at a subsequent stage by the middleman/First Beneficiary.

Must be expressly designated as such by using the word “Transferable”. Other words such as“divisible” or “transmissible” do not make the credit transferable.

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Transfer is effected by an instruction from the First Beneficiary to the bank where the D/C is available.The bank receiving such request will decide whether or not they will effect the transfer.

Bank charges in respect of the transfer are payable by the First Beneficiary unless otherwise agreed.If the Transferable D/C allows for partial shipment the said D/C may be transferred to one or more

Second Beneficiaries, each party receiving its own portion of the transfer.Can only be transferred once, i.e. it cannot be transferred from the Second Beneficiary to a third

Beneficiary, unless otherwise stipulated by the D/C. Ulster Bank will not accommodate suchvertical transfers.

A Transferable D/C is defined in Article 48 of the UCP 500.

Modifications to a Transferable Credit on Transfer

The name and address of the First Beneficiary may be substituted for the name and address of theApplicant of the D/C and the transferred part of the D/C will be issued in the name of themiddleman/First Beneficiary. This helps keep the identity of the ultimate buyer hidden from thesupplier/Second Beneficiary. However, if the name and address of the Applicant is specificallyrequired by the original terms to appear in any documents such requirement must be fulfilled.

The amount of the D/C and the unit price will be reduced, to allow the First Beneficiary to take hisprofit.

The validity date of the D/C and the period for shipment may be shortened to allow the First Beneficiarytime to present the documents under the credit after the Second Beneficiary has delivered his owndocuments.

The First Beneficiary can substitute his own invoices for those of the Second Beneficiary.The percentage for which insurance cover must be taken can be increased. This means that the Second

Beneficiary can be required to obtain sufficient insurance cover under the Transferred D/C to satisfythe requirements of the Applicant/end buyer under the terms of the original D/C (for example CIFplus 10%).

If there are any other documents (for example shipping documents) which might otherwise include thename of the original supplier, the middleman should stipulate that these documents should not includethe supplier’s name but should show the name of the middleman or be a neutral name unless the originalD/C stipulates that the Supplier’s/Manufacturer’s name must be specifically stated. This is necessary tokeep the identity of the supplier hidden from the buyer.

Advantages for the Middleman

A transferable D/C does not use up any of the middleman’s credit facilities. This is important where themiddleman’s balance sheet has insufficient strength to support a separate D/C.

The middleman is able to offer his supplier(s) a conditional guarantee of payment provided thedocuments presented are in accordance with the D/C.

A Transferable D/C can be used in such a way that the buyer/importer does not know the identity of theoriginal supplier.

As fractions of the D/C can be transferred separately, a middleman can obtain goods from a variety ofsuppliers.

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Possible Disadvantages for the Middleman

The First Beneficiary can only request that the Advising Bank transfers the D/C but the said bank is notobliged to do so under UCP rules.

The First Beneficiary is required by Ulster Bank and other banks to pay all charges relating to thetransfer of the D/C before transfer is effected.

The middleman may not be able to persuade his buyer to issue a Transferable D/C as this would indicatethat he is not dealing direct with the supplier and therefore may be paying more than necessary forhis goods.

Some traders prefer not to use Transferable D/C as there is more chance of the two end parties beingdisclosed to each other and dealing direct in future without the middleman’s involvement.

Inhibits buying and selling on different terms.

Risk Considerations

Where Ulster Bank as Advising Bank, is asked by a middleman to transfer a Transferable D/C to asecondBeneficiary, the D/C should stipulate that it is payable at the Bank’s own counters. This condition isimportant as the Transferring Bank will wish to insert an earlier expiry date (and last permissible datefor shipment if one is stipulated) than on the original D/C in order to allow the middleman time topresent his own documents as stipulated in the D/C.

When handling Transferable D/C’s it is important to bear in mind that if for any reason the FirstBeneficiary fails to present his own invoices in time, the Advising Bank has the right to submit to theIssuing Bank the documents it received (including the Second Beneficiary’s invoices) without furtherresponsibility to the First Beneficiary.

Back -to- Back Credits

Ulster Bank Policy on Back-to-Back D/C’s

Back-to-Back Credits can be complex to administer, time-consuming and involve a high degree of risk.Where Back-to-Back Credits are requested most clearing banks, including Ulster Bank, are generallyreluctant to issue such D/C’s and would normally encourage the use of a Transferable D/C.

Standby D/C’sA Standby D/C is a guarantee from the Issuing Bank that a sum will be paid to the Beneficiary upondemand in the event that the latter submits a signed statement to the effect that there has been a defaultor non-performance by the Applicant of the D/C.

A Standby D/C therefore enables an exporter and importer to trade on open account terms against thesecurity of a bank guarantee in the background. A Standby D/C has the following characteristics: -

Typically issued for a fixed term (for example, 1 year) covering a series of shipments during this period.The maximum value of the Standby D/C would normally cover 1-2 shipments.

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If trade between the exporter and importer runs smoothly, payments would be made on open account.Thus the Standby D/C can remain dormant in the background as security for the exporter in case of

need.

It is only if the importer/applicant defaults on payment that the Standby D/C would be used. Inthis event, the Standby D/C would provide for the supplier to present certain documents that wouldtypically include the following: -

- A Bill of Exchange drawn on the Issuing Bank.- A copy of the commercial invoice.- A signed statement that payment has not been received within a stated time after the due payment date.

On receiving documents in accordance with the D/C, the Issuing Bank would make payment to theBeneficiary and claim reimbursement from the importer/applicant.

Advantages of Standby D/C’s

Reduces the total commitment of the Issuing Bank, since the amount typically only represents the valueof 1-2 shipments, rather than the overall number of shipments anticipated during the validity of theStandby D/C.

Reduces the level of credit limit required by the Applicant, which can be very useful, where theApplicant’s balance sheet would be inadequate to support the value of the full commercial contract.

Acts as a guarantee for trade conducted on open account terms.

Avoids the production of the specific documentation normally required for each shipment under aconventional D/C.

Can be used where banks are restricted by local legislation from issuing normal guarantees. Forexample, in the USA banks are not permitted to issue guarantees and Standby D/C’s are thereforeused as an alternative.

Can be used instead of Advance Payment Guarantees, Performance Bonds, etc.

Revolving D/C’sA Revolving D/C is one that states that the amount is renewed or reinstated automatically withoutspecific amendments. A Revolving D/C allows flexibility in commercial dealings between importersand exporters, particularly where there are regular shipments of the same type of goods, therebyavoiding the need for repetitive single value/shipment D/C’s to be issued.

It is emphasised that a D/C that is available for a certain amount and calls for specified quantities ofgoods to be shipped within a given period is not a Revolving D/C. Rather it is a D/C available byinstalments as provided for under UCP 500.

A Revolving D/C may revolve in relation to Value or Time as described below:

TimeThis type of D/C revolves around time; for example where a D/C is made available for up to £10,000 permonth during a fixed period of time, say 9 months. The D/C is automatically available for a maximum

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of £10,000 each month irrespective of whether any sum was drawn during previous months. The totalpossible liability for the banks involved would be £90,000. This type of D/C can be cumulative or non-cumulative.

CumulativeAny sums not utilised during one period can be carried forward and utilised within the existing limit fora subsequent period.

Non-CumulativeAny sums not utilised during one period cease to be available and therefore cannot be used insubsequent periods.

Non-Cumulative Revolving D/C’s with respect to time are the most common type of Revolving D/Cavailable.

ValueThis type of D/C is rare as the full value of the D/C would be reinstated after each drawing with no limitto the frequency of the drawings. Unless the D/C states an overall limit of value, theexporter/beneficiary can ship goods for as much as he is able during the validity of the D/C.

Under a Revolving Credit the amount may be reinstated automatically either upon presentation ofdocuments by the Beneficiary to the Advising Bank or upon receipt of the said documents by the IssuingBank.

Advantages of Revolving D/C’sGives the exporter/beneficiary a considerable degree of flexibility in fulfilling a contractAvoids the need for repetitive single value/shipment D/C’sEnsures that the documentation requirements are constant for all shipments

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Summary

Import Letters of CreditA Documentary Credit-often also referred to as a Letter of Credit-opened on behalf of acustomer (theimporter) conditionally guarantees payment to the exporter, provided that the documentationsubmittedby the exporter complies with all the conditions specified.

Eligible/Suitable Customers

• Ulster Bank customers involved in importing who are of undoubted standing and have a sanctionedDocumentary Credit facility in place.

Main Benefits• A secure method of settlement for both parties where the importer can stipulate the exact

documentation that the exporter must provide in order to be paid.• Can be used by the importer to negotiate extended credit terms from the exporter.

What does the product do?• By opening the Documentary Credit Ulster Bank guarantees that it will pay the exporter even if the

importer is unable to do so, provided that the correct documentation is submitted.• Adheres to an internationally accepted set of rules issued by the International Chamber of Commerce

commonly known as UCP 500.

Export Letters of CreditA Documentary Credit - often also referred to as a Letter of Credit - opened on behalf of an overseasbuyer in favour of our customer (the exporter) conditionally guarantees payment to the exporter,provided that the documentation submitted by the exporter complies with all the conditions specified

Eligible/Suitable Customers• Ulster Bank is able to deal with Export Documentary Credits for customers and non- customers alike

who are involved in exporting.

Main BenefitsApart from payment in advance, this is the most secure method of settlement for the exporter.

What does the product do?• Allows the buyer to stipulate the precise documentation to be submitted by the exporter in order to

get paid.• By opening the Documentary Credit the issuing Bank guarantees that it will pay the exporter even if

the overseas buyer is unable to do so, provided that the correct documentation is submitted.• In certain countries, especially the Far East, Documentary Credits are a customary settlement

method, frequently used to raise Trade Finance.• All Banks involved in the transaction deal with documents and not with the goods to which the

documents relate.

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• Adheres to an internationally accepted set of rules issued by the International Chamber of Commercecommonly known as UCP 500.

Import CollectionsThe Inward Bill is a universally recognised method for setting overseas trade debt through theInternational Banking system. It may be the settlement method stipulated by the Overseas supplier.

Eligible/Suitable CustomersAll customers involved in importing

Main Benefits• Simpler than Documentary Credits, with lower charges.• Defers payment until the importer knows that the goods have been shipped (or have arrived, if

authorised in the Collection instruction).• A period of credit may be negotiated with the exporter.

What does the product do?• Ulster Bank receives the Collection from the overseas bank and forwards the Bill of Exchange (and

documentation, if any) to the customer (the importer) for payment or acceptance.• Once the customer has confirmed agreement to the Collection terms and conditions, Ulster Bank will

arrange settlement.• The Collection will stipulate precise terms and conditions for release of documents against payment

or acceptance.• Adheres to internationally accepted rules issued by the International Chamber of Commerce known

as URC 522.

Export CollectionsThe Outward Bill is a universally recognised method for settling overseas trade debt through theInternational Banking system. It enables the exporter to maintain control of the goods pending paymentor acknowledgement of the debt by the importer.

Eligible/Suitable Customers• All customers involved in exporting.

Main Benefits• Simpler and less onerous than Documentary credits with lower charges.• Safer than trading on “Open Account” terms.• Ulster Bank relieves the customer of the burden of collection and chasing benefits.

What does the product do?• Standard Bills service-Ulster Bank despatches the documentation and manages the collection of

proceeds.• Expedited Bills service-enables the exporter to produce documents on Ulster Bank headed stationery

and send them direct to the importer’s Bank-recommended for customers who undertake OutwardBill collections on a regular basis and who have experience of documentary procedures.

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• Adheres to an internationally accepted set of rules issued by the International Chamber of Commercecommonly known as URC 522.

Bonds and GuaranteesA Bond or Guarantee gives the beneficiary the security of a financial guarantee in the event of thePrincipal's failure to meet the obligations of a contract. It is issued by a guarantor, sometimes referredto as the surety, (usually a Bank) on behalf of the exporter.

Eligible/Suitable Customers• Exporters and overseas contractors across all customer segments having facilities available with

Ulster Bank.• Examples of industries where Bonds, and guarantees are widely used include heavy engineering and

construction.

Main Benefits• Ulster Bank offers a full service including issuance and control throughout the world via its extensive

correspondent Bank network.• Experienced staff provide advice on wording prior to issuance.

What does the product do?Brief features of the main bond types are stated below• Advance payment - Gives protection to the beneficiary who has made an advance payment to the

principal before the contract has been completed.• Tender - Guarantees that should the principal be awarded the contract on which he is bidding, he will

take up the contract offer, or forfeit the value of the tender bond.• Standby Letters of Credit - Similar to Guarantees, these can cover several types of transactions.

Standbys are often payable against the sellers signed certificate stating that payment of theunderlying goods has not been received.

How much do all of these products cost?Refer to Schedule of Service and Foreign Transaction Charges.

Who are the contact points?

The Trade Finance area is located at:

Ulster Bank LtdCCS DanesfortStranmillis RoadBelfast BT1 5UBThe initial contact for all queries is:Jill Colhoun Telephone (028) 90762372 N.I.

(048) 90762372 RoIFAX (028) 90762370 N.I.

(048) 90762370 RoI