LC - Common Mistakes

8/3/2019 LC - Common Mistakes'

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Preventing discrepancies

In order to prevent discrepancies from occurring when documents are presented under the letter

of credit, the exporter should take the following steps as soon as the sale is concluded, but

before the letter of credit is opened.

1. Fax the buyer the terms of the letter of credit, which should conform to the underlying contractof sale between the exporter and importer.

2. After the buyer completes the letter of credit application, which it will take to its bank, the

exporter should also ask that the buyer fax a copy of the letter of credit application to the

exporter for its review. It is much cheaper to change the terms of the proposed letter of credit

BEFORE it is issued; after it is issued the buyer has to pay additional fees for amendments to

change the terms of the letter of credit.

3. The exporter should make sure that the description of the merchandise as it appears in the

letter of credit is stated exactly the same as on the invoice. The exporter must insure that the

accounting department (invoice), shipping department (packing list), and the freight forwarder

(bill of lading) are all aware of the importance of describing the goods in conformance with the

L/C.

4. The exporter should request at least a 14-day period in which to present documents after the

shipping date. If the L/C is silent on the presentation period, the period of time that is allowed by

Article 43.a of the UCP is 21 days. Since late presentation is one of the most common

discrepancies, this simple request should alleviate the possibility of a late presentation. Not only

does a 14-day (or more) period allow the exporter some extra time in putting together the

documents, it also allows for time to make the needed corrections to discrepancies after the

negotiating bank discovers discrepancies. A 21-day period is essential for transferable letters of

credit since the process of presenting documents by both the first and second beneficiaries can

be time consuming. (If the presentation period is 21 days, the exporter, of course, can present

documents as soon as practical in order to speed up the receipt of the L/C drawing.)

5. The exporter should discuss the INCO terms in the L/C with its freight forwarder to insure that

the proper shipping documents can be provided with the shipment along with the required

signatures if necessary.

Common discrepancies

In order to assist the exporter in reviewing the documents when compared to the terms of the

letter of credit, we have put together the following list of areas where typical discrepancies occur.

The exporter should have a detail oriented person within the company do this examination and

not rely exclusively on the bank or freight forwarder to catch discrepancies. The exporter should

make sure that its staff dealing with L/Cs and its freight forwarder are familiar with UCP 500.

Draft (Bill of Exchange)

Although drafts are similar to checks, they do not possess any special characteristics such as

micro encoding. The easiest method of preparing drafts is to use your PC word processing

program or have your bank prepare it for you.

The draft is correctly drawn if:


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1. The draft refers to the letter of credit; specifying issuing bank and its L/C reference number,

and is phrased according to the L/C terms.

2. Amount in words is identical with amount in figures.

3. The draft bears the appropriate endorsement if the payee is the exporter.

4. The exporter signs the draft.

5. The tenor of the draft (at sight or some days after sight or bill of lading date) conforms to the

terms of the L/C.

6. Names and/or addresses of drawee and buyer agree with L/C terms.

7. All names are correctly spelled.

8. The amount of the draft correlates to the invoice.

Invoice

1. The invoice indicates that it has been prepared by the exporter and addressed to the buyer(account party under L/C). The names of the buyer and seller on the invoice should correspond

exactly to the names and addresses of the account party and beneficiary in the L/C.

2. The merchandise is described exactly as in the letter of credit; the merchandise description

must be consistent with the packing list and bill of lading. All documents must be consistent with

each other.

3. Purchase order numbers agree with the L/C if they are listed.

4. The invoice must list the prices and unit prices and various charges/expenses if required by

the L/C.

5. A sufficient number of invoices must be presented as required by the L/C. (Read carefully, as

sometimes the importer may request multiple invoices marked as "ORIGINAL" and additional

invoices marked as "COPY".)

6. The invoice must indicate shipping terms, if required by the L/C.

7. If required by the L/C, all listed items (merchandise, freight, insurance, and handling) must be

allowed under the shipping terms. For example, if the shipment were on a C&F basis, but the

exporter bills for insurance, then a discrepancy would occur.

8. The amount of ocean freight and/or insurance premium, if listed, agrees with amounts shown

on bill of lading and/or insurance document and/or other documents.

9. If the L/C allows partial shipments, the portion of merchandise shipped should not be invoiced

out of proportion to the total amount of the L/C.

10. The invoice must show all the clauses, certifications, and/or visa requirements following the

exact the terms of the L/C.

11. Shipping container descriptions (quantity, weight, and measurement) on the invoice must

correlate with the bill of lading, packing list, and other appropriate documents if required.


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Insurance Documents

1. If L/C requires an insurance certificate, a certificate should be presented; if an insurance policy

is required, then a policy should accompany the presented documents. Under UCP Article 34.a

the insurance documents must appear on their face to be issued and signed by insurance

companies or underwriters or their agents.Under UCP Article 34.b if the insurance document

indicates that it has been issued in more than one original, all the originals must be presentedunless otherwise authorized in the L/C.

2. It is not endorsed, to be in transferable form, provided the L/C does not require the buyer, its

bank, or other representative to be the beneficiary of the insurance.

3. It is in the currency of the L/C unless the L/C states otherwise.

4. Under UCP Article 34.f. the insurance must cover the CIF or CIP value plus 10 percent, if the

value can be determined. (This article should be read in detail to understand its implications.)

5. Merchandise description is consistent with the L/C. It lists the marks and numbers of packages

and quantities in accordance with the other documents.

6. It is dated on or before the date of shipment or indicates that coverage is established as of the

date of shipment.

7. It covers merchandise upon the carrying vessel specified in the B/L with shipment from the

proper point of loading to the proper destination.

8. It covers all risks specified in the L/C.

9. The amount of the insurance premium agrees with that appearing on the invoice, if listed.

Transport Documents

The following articles in the UCP deal with transport documents. This area is one wherediscrepancies commonly occur. The exporter should carefully review these sections in

consultation with its freight forwarder to insure that transport document discrepancies do not

occur.

The exporter should make sure that its freight forwarder has a copy of the L/C before the

forwarder books the freight and obtains the B/L. This should help eliminate obvious discrepancies

concerning markings on the B/L, ports of loading and discharge, shipping terms and description

of goods.

The transport document must be signed by the carrier (or in some cases an agent of the carrier)

and the signature must identify (usually below it) the name of such carrier (or agent).

For additional information, we suggest that you get a copy of the most recent UCP Articlces andreview the following articles to familiarize yourself about the types of transport documents and

how they differ. Those UCP Articles include:

Article 26 - Marine/Ocean Bills of Lading

Article 24 - Non-Negotiable Sea Waybill

Article 25 - Charter Party Bill of Lading

Article 26 - Multimodal Transport Document


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Article 27 - Air Transport Document

Article 28 - Road, Rail or Inland Waterway Transport Documents

Article 29 - Courier and Post Receipts

Article 30 - Transport Documents issued by Freight Forwarders

Article 31 - on Deck, Shippers Load & Count, Name of Consignor

Article 32 - Clean Transport Documents

Article 33 - Freight Payable/Prepaid Transport Documents

Since we cannot go into great detail on any one subject, only a few items on Marine Bills have

been listed below as examples that you should be familiar with:

Marine Bill of Lading

1. A full set of original bills of lading signed by a named carrier, or agent, must be presented, or

otherwise accounted for in accordance with the terms of the L/C. It is not acceptable for the B/L

to be issued by a Forwarding Agent, except acting as agent for a named carrier.

2. The bill of lading terms are not altered without authentication by the issuer.

3. Bill of lading is not a Charter Party Bill of Lading unless specifically authorized by the L/C.

4. The B/L shows a date of shipment on or before the latest shipment date authorized in the L/C.

5. The B/L does not evidence transshipment, if prohibited by the L/C.

6. The merchandise description is consistent with the commercial invoice. The marks and

number of packages, weights, dimensions and quantities are in accordance with other

documents.

7. The B/L is clean; i.e. it does not contain clauses, which expressly declare a defective

condition of the goods.

8. The B/L should be consigned exactly as per the L/C terms and endorsed properly, if required.

9. The notify party is specified on B/L exactly as per the L/C terms.

10. The B/L should show the loading and discharge ports as specified in the L/C.

Again, we have only provided you with some examples of areas that can cause possible problems

with export documents that may slow-down or prohibit you being paid in accordance with the

terms of an L/C. If you are going to be involved in either import or export of merchandise on a

regular basis, you should buy a copy of the UCP 500 and review it thoroughly.