Apropiación y posicionamiento que asumen los docentes

Trade finance has been described as the

bread-and-butter operation of international lending. Indeed, trade finance is the great grand-daddy of international banking … the prime instrument of trade finance is the Letter of Credit (Hughes and MacDonald 2002, p. 105).

Obviously banks charge fees for Letter of Credit business but they consider these instruments of payment as “contingent liabilities since most will never require the bank to make a payment” (Hughes and MacDonald 2002, p. 105). This is because under normal circumstances, a bank will secure the issue of a Letter of Credit by obtaining security from the buyer (applicant) beforehand.

The level of security required by banks varies form country to country. For example, in Australia, banking industry sources reveal that virtually all import Letter of Credit business, (that is, business issued from Australia) requires the applicant to provide one hundred percent collateral guarantee (this requirement is slightly relaxed for the very large corporations), and this appears to be consistent with the conservative behaviour of banks in Australia. In cases where the security given to the bank is in the form of foreign currency, banks are known to “seek up to 120% security (to cover any exchange rate fluctuation)” (Anon., Personal correspondence to Bergami 2009d). These approaches have the effect of preventing the bank’s liability moving from contingent to realised, because the bank already has enough available security to meet the demand for payment.

In other countries, where less than one hundred percent security is obtained, the bank may be financially exposed by the shortfall in security arranged at less than one hundred percent. As an example, the following situation could develop. In a Letter of Credit transaction, the bank only takes seventy percent security. The Letter of Credit is issued, the goods are despatched and compliant documents are presented by the exporter seeking payment. The bank already holds seventy percent of the amount required, and to meet its payment undertaking fully, seeks the balance of the funds (thirty percent) from the applicant. However, the applicant is unable to raise the balance of thirty percent, due to financial difficulties. As the bank must honour its undertaking to pay on time, it must therefore make good the shortfall of thirty per cent from its own reserves and, subsequently, aim to recover from the applicant. If the bank is unable to do so, it will incur a bad debt. Therefore, it is not difficult to see that, in a Letter of Credit transaction, a bank wants to obtain prior security from the applicant, in order to avoid having to meet their undertaking to pay obligations from their own reserves.

In summary, “in international practice the [Letter of Credit] transaction, is usually rectangular” (Dolan 1992, p. 396), with four participants: the exporter, the importer, the issuing bank and the advising bank.

The primary obligations of the importer in a Letter of Credit transaction

The obligations of the importer as the applicant of the Letter of Credit may be summarised as having to apply for the Letter of Credit and lodge security as demanded by the issuing bank. Given that the Letter of Credit, in effect, substitutes the buyer’s credit risk with that of their bank, the buyer is no longer a party to the payment mechanism of the Letter of Credit, unless discrepant documents are presented, in which case the issuing bank may need written acceptance of the documents (waiver) from the buyer before effecting payment – this process is further discussed in Chapter 4.

The primary obligations of the issuing bank

The obligations of the issuing bank are to establish the Letter of Credit and make this available to the exporter, typically via the advising bank, and to check documents and accept or reject these and pay accordingly. The high discrepancy and rejection rates (up to 70% on first presentation, according to the ICC) were largely claimed to be the result of documentary checking procedures. The standards by which documentary checks are practised have been the subject of much controversy over the years. The

UCP 500 became effective in 1994 and in Article 13 there is a reference to the fact that documentary compliance “shall be determined by international standard banking practice as reflected in these articles” (International Chamber of Commerce 1993, p. 19). The problem with this statement is that no such standard actually appeared in the UCP 500, consequently, “the lack of such a published practice has resulted in an environment where various banks have different rules on acceptability, or otherwise, of documents” (Walden 2003, p. 23). Banks were expected to discharge their obligation against a specified ‘standard’ that did not actually exist and, consequently, devised their own ‘standards’ – just how a unified standard could have been expected to develop in these circumstances continues to remain a mystery.

In fact, the ICC did not correct the anomaly of a lack of standard for ten years, when finally, in 2003, the ‘International Standard Banking Practice for the Examination of Documents under Documentary Credits” (International Chamber of Commerce 2003b), and commonly referred to as ISBP, was released. One banking expert claimed that “in one sense the ISBP is ten years late” (Collyer 2003), in fact, simple arithmetic would put the release of the ISBP exactly ten years late and the meaning of ‘in one sense’ is not easily understood.

The ISBP was a contentious document. It was touted as a ‘fix’ to the perennial problem of documentary discrepancies in Letter of Credit trade. It was seen as “a strong first step in clearing away some of the mystique that has risen around the letter-of-credit process – and to restoring a winning scenario for all parties worldwide” (Smith 2002b, p. 11), because the practices documented in this publication, should enable parties to deal successfully with almost any examination eventuality” (Smith 2002a, p. 31). It was claimed that the ISBP “aims to encourage uniformity of practice, thus decreasing transaction costs in trade finance” (Mehta 2004a, p. 1), and certainly the ICC itself boldly stated that it had “taken steps to reduce dramatically the number of letters of credit rejected on first presentation, thereby causing costly delays and slowing world trade” (International Chamber of Commerce 2003a). These comments were supported by articles claiming that the ICC had “approved a best-practices paper [ISBP] that is expected to reduce the number of documentary credits rejected by banks” (Association for Financial Professionals 2003). Further support for the ISBP, not surprisingly, came from the banking industry, with claims that

since the onus is on exporters to produce LC [Letter of Credit] documentation that is in compliance with UCP 500 rules and regulations, they should find the ISBP very, very useful. The ISBP will help our export customers achieve a better understanding of how to prepare their trade documents in a way that will ensure faster trade resolution and payment (AmSouth Bank 2003, p. 2).

Unfortunately, the comments above did not portray the picture of reality, surrounding the ISBP. A more accurate picture of just what the ISBP contributed, or failed to contribute, to the ease of documentary compliance may be found by referring to particular sections of the ISBP text (International Chamber of Commerce 2003b), including

• “The ISBP does not amend the UCP. It explains, in explicit detail, how the rules are to be applied on a day-to-day basis” (p. 3);

• “It explains how the practices articulated in the UCP are to be applied by documentary practitioners” (p. 8); and

• “The incorporation of this publication into the terms of a documentary credit should be discouraged, as the requirement to follow agreed practices is implicit in the UCP” (p. 9).

It should be noted at the onset that the ISBP was written for bankers, not for traders, as “by using the ISBP, document checkers [working within the banking industry] can bring their practices in line with those followed by their colleagues worldwide” (International Chamber of Commerce 2003b, p. 4). An understanding of the ISBP presupposes a mastery of the UCP and an ability to read both sets of ‘rules’ and interpret these as if one were a banker – this task, if at all possible, is not easy.

It should also be noted that the ICC itself actually failed to impose a standard for documentary checks in Letter of Credit transactions, as a result of how the ISBP would be regarded (their status) and also in how they would be adopted (voluntary). As mentioned earlier, the ISBP principles do not over-ride the UCP, as they are merely a ‘companion’. The ISBP contain a set of 200 ‘guiding principles’ that, whilst potentially useful, have no status of their own, because they are not binding. Documentary discrepancies must cite breaches of the UCP, not the ISBP, and this is so because the ISBP are not to be incorporated into the Letter of Credit. In relation to the voluntary adoption of the ISBP, there is cause for concern, because a voluntary system runs counter to the notion that a common standard applies. For example, banks may be found

adopting the ISBP for their import letters of credit but going more slowly when handling their export documents for fear that the issuing

bank has not accepted the ISBP as their standard operating procedure” (Lidberg 2003).

Unless there is total adherence, a common standard may not apply, consequently, a two- tier banking system may develop: the ISBP-adhering banks on the one hand and, on the other, the non-ISBP-adhering banks. The differing approaches adopted by banks are captured in the following statement by a UK bank:

We do not check documents in accordance with ISBP 645, since our letters of credit are not subject to ISBP 645. To put wording into our credits seeking to clarify or over-ride certain paragraphs of ISBP 645 would be illogical, as this would give credence to a document to which the credit is not subject. Having said that, any bank who chooses to ignore ISBP 645 would do so at its peril. It is a guide to how ISBP is generally interpreted and is an approved ICC publication, albeit not unanimously. It is probably prudent to say that although ISBP 645 reflects international practice, the practice is not reflected internationally. My own opinion is that in three or four years time, after much litigation, it may become standard practice for banks to issue letters of credit making reference to both UCP 500 and ISBP 645. It should be further borne in mind that with the ink on ISBP 645 barely dry, the ICC has embarked on the revision of UCP, with UCP 600 notionally due in two years' time. This would suggest that ICC regards ISBP 645 as a poor relation of UCP (Miller 2004).

It is difficult to see how uniformity of practice and consistency in documentary checking procedures, and outcomes, is actually achieved in such an operating environment. How could the ISBP indeed reduce discrepancies? The answer to this was to be provided by the comment made in the subsequent version of these guidelines, as discussed below.

There was an up-date to the UCP 500, with the release of the UCP 600, effective from 2007. Unlike its UCP 500 predecessor, UCP 600 was released with an up-dated version of the ISBP – the 2007 revision. Two points are worthy of note in relation to the 2007 ISBP revision.

One point is that

though much of the ISBP remains unchanged from the 2002 version, certain changes had to be made. These are essentially to remove paragraphs from the ISBP where the principle has been incorporated in UCP 600; to make technical adjustments in capitalisation; to substitute UCP 600 article references for those of UCP 500; to change dates (from 2006 to 2007); and to incorporate changes in ISBP paragraphs necessary

to bring the wording in line with the UCP 600 (International Chamber of Commerce 2007b, p. 3).

As can be observed from the above comments, the changes in the up-date were not fundamental.

The other point that is worthy of note is that the 2007 ISBP may have even less status than its 2003 counterparts, because of the vagueness of the UCP 600 Article 2 that defines, in part, a ‘complying presentation’ as being “in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice” (International Chamber of Commerce 2006, p. 17). Similar provisions also appear in Article 14 d of the UCP 600 that refer, in part, “to data in a document when read in context with … international standard banking practice” (International Chamber of Commerce 2006, p. 27). However, as the Secretary of the ICC Czech Republic Banking Commission points out that

international standard banking practice in this context does not mean the ICC publication containing the ISBP. It means international standard banking practice in the broader sense, which definitely includes, but is not limited to, the ISBP publication (Andrle 2007, p. 18).

The subtle, but significant, point is that the ICC failed to specify explicitly to which international standard banking practices they refer. Whilst it may be implied that the intention was to refer to the ISBP, this cannot be definitively claimed, especially in light of the acknowledgement that “whilst many of these practices are contained in the [ISBP] publication, the practices [used in the banking industry] are broader than what is stated in this publication” (International Chamber of Commerce 2007a, p. 16). The lack of authority of the ISBP principles is also underscored by the UCP 600 Article 16 that, in dealing with discrepant documents, the bank is required to provide a single notice of refusal to the presenter that, pursuant to Article 16 c ii “must state … each discrepancy in respect of which the bank refuses to honour or negotiate” (International Chamber of Commerce 2006, p. 29). As stated before, as the ISBP are not an integral part of the Letter of Credit, discrepancies must be linked back to breaches of the UCP alone.

The impact of the ISBP in reducing discrepancy rates does not appear to have lived up to expectation, with the ICC stating that “anecdotal evidence suggests that this objective has been partially attained”(International Chamber of Commerce 2007b, p. 3).

In summary, an explanatory set of guidelines, the ISBP, has been issued designed to engender clarity and consistency in the application of the UCP, however, these guidelines have neither authority, nor mandatory application and, consequently, their relevance in reducing documentary discrepancy rates under Letter of Credit transactions is in doubt. The topic of documentary discrepancies, which is the main focus of this thesis will be discussed later in this section and also discussed in greater detail in Chapter 4.

Having considered the responsibilities of the issuing bank, it is important to consider the obligations of the advising bank.

The primary obligations of the advising bank

The obligations of the advising bank are potentially more difficult to define because the advising bank may assume a number of different roles, although still subject to the same requirement of the UCP. The advising bank, in the simplest role, acts as an agent of the issuing bank in advising the Letter of Credit to the exporter (beneficiary), after having reasonably established its bona fide, ‘without responsibility on its part” (Venedikian and Warfield 1992, p. 347, 2000, p. 360). The advising bank need not do any more unless it agrees to do so. It may be that the advising bank having handed the Letter of Credit to the beneficiary is no longer involved in the transaction, This is particularly so if the exporter (beneficiary) is not a customer of that bank and the Letter of Credit is not restricted to any particular bank, meaning the documents may be lodged by the presenter at the counters of any bank in their country6. Under these circumstances the advising bank has very little involvement and responsibility. However, the role of the advising bank could be expanded, where it agrees to perform other functions. These other roles, discussed in greater detail in Chapter 4, include those of (Jimenez 1997): the ‘nominated bank’ – authorised to pay, issue a deferred payment undertaking or accept drafts; the ‘negotiating bank’ – purchases the draft and the documents from the exporter (beneficiary) with recourse7; the ‘paying bank’ – pays the

6

Although it is possible for the Letter of Credit to require the documents to be presented in the country of the issuing bank, this is not usual practice,

7

The negotiating bank retains the right of recourse in case the issuing bank fails to reimburse the negotiating bank. The negotiating bank may also be willing to discount the proceeds, as discussed earlier.

exporter (beneficiary); and/or the ‘confirming bank’ – adds its own irrevocable undertaking to pay and must pay without recourse8 against compliant documents.

It is generally accepted that the majority of Letter of Credit business is not confirmed, with claims that “approximately 90% of all documentary credits are issued in an unconfirmed form” (de Rooy 1984, p. 36). Whilst it is difficult to ascertain the ratio of unconfirmed versus confirmed transactions, the tendency is not towards automatic requests for confirmation, mainly due to cost considerations, unless, of course, trade is conducted in a comparatively high-risk environment. The current global financial crisis provides evidence that, increasingly, traders are favouring Letter of Credit transactions, with confirmation becoming more popular at the present time.

Under a caveat of confidentiality (Anon., Personal correspondence to Bergami 2009c), banking industry sources in Australia claim that, in the period between the last quarter of 2008 to the middle of 2009, there has been a considerable shift in the methods of payment choice by Australian exporters, in general. Estimates are that up to forty percent of export business is under Letter of Credit terms and that in seventy-five percent of these cases the Letter of Credit is confirmed. This information appears to support the general notion that in times of economic difficulties businesses tend to operate more cautiously.

In recent years the popularity of the Letter of Credit, as a payment instrument, has received positive and negative support. Some argued that “letters of credit are no longer the only game in town … large importers prefer to trade on open account terms instead of using the LC [Letter of Credit], which is seen as unduly cumbersome and costly” (Jee 2005, p. 30), and “exporters are urged to be more aggressive in exporting their products by not relying on letters of credit” (Bernama 2003, p. 10). Others responded by pointing out that “L/C [Letters of Credit] continue to be the dominant payment method for many major finished good and retail importers” (Gustin 2004, p. 42) and that Letter of Credit business is a better option

Today, exporters typically handle more transactions of lesser value – which equates to a higher cost of doing business. At the same time, a

8

If the confirming bank accepts the documents as tendered and deems them compliant, it must pay without recourse, that is, without the ability to recover the money from the exporter (beneficiary). The confirming bank assumes the issuing bank’s credit and documentary risks, holding the exporter (beneficiary) harmless against these risks. If the issuing bank becomes insolvent, the confirming bank will incur a financial loss. If the issuing bank refuses to pay because of legitimate discrepancies, the confirming bank will incur the financial loss.