Documentary Letter of Credit scrutiny – Common discrepancies | Trade Samaritan

Documentary Letter of Credit scrutiny – Common discrepancies

An understanding of the most common discrepancies that banks find in examining documentary credit (DC) presentations can instruct the exporters and help them avoid the common rejections.

Documentary credit scrutiny seems complicated and requires thorough understanding of document check principles (doc-check) is because banks are not only supposed to check the documents against the LC, but also against each other. This means that rejections can happen even when there is no specific breach of an LC requirement. For example: Shipping mark shown on the invoice differs from those on the bill of lading. The bank has right to reject the documents even if no specific shipping mark is mentioned on the LC (inconsistency).

The most common and top ten discrepancies as shared by ICC as guidelines are as follows:

  1. Documents not presented in time (within time allowed or 21 days)
  2. Absence of documents requested in the LC
  3. Description of goods on invoice differs from that on the LC
  4. Claused bill of lading/transport document
  5. Invoices not certified as requested
  6. Insurance not effective from the date of shipment
  7. Documents inconsistent with each other
  8. Bill of exchange not drawn in accordance with the LC
  9. Late shipment
  10. No evidence of goods shipped on board.

It will be of great help to the industry if all parities to LC are aware of the common discrepancies and the alternatives.

The documents presented under a documentary credit are scrutinized as per the International standards of scrutiny and negotiated if they strictly comply with the LC terms; this is called a clean negotiation.
On the other hand if the documents do not comply with the LC terms and discrepancies are found, the negotiating bank may still opt to give value under the LC by paying or incurring a deferred payment obligation as per LC provided the beneficiary undertakes to indemnify the negotiating bank in the event of rejection by the LC opening Bank. This is technically called a payment under reserve or on approval basis. The Reserve will be lifted on acceptance of discrepancies by the LC opening Bank.

Alternatives available if the documents presented by the beneficiary do not meet the LC requirements:

  1. Return to beneficiary to have them corrected for resubmission within LC validity and within presentation period
  2. Send documents for approval
  3. Cable the issuing bank for authority to pay/negotiate/accept
  4. Negotiate under reserve or on approval basis
  5. Return the documents to the beneficiary

Reference:

International Chamber of Commerce

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