Bank of America Solutions for Importers
An Importer’s Guide to Global Trade Services
Bank of America Solutions for Importers
An Importer’s Guide to Global Trade Services
Bank of America merrill lynch Solutions for exporters
Table of Contents Table of Contents
An Importer’s Guide to Global Trade Services
01 Introduction to Global Trade Services
02 Overview of Trade Services
03 Understanding Your Payment Options
05 Trade Solutions
10 Risks
15 Working with Your Bank
17 Services to Meet the Diverse Needs of the Importer
21 Let Bank of America Introduce a Few Ways You Can Increase Opportunities
23 Import Letters of Credit Defined
29 Frequently Asked Questions
31 Parties and Roles in Commercial Letter of Credit Transactions
32 Mitigating the Risk of Fraud in the Trade Arena
33 Anti-Money Laundering Policies and OFAC Compliance at Bank of America
35 20Most Important Characteristics of an Import Letter of Credit
37 Understand and Control Your Import Letters of Credit
38 Opening a Commercial Letter of Credit
42 Understanding the Commercial Letter of Credit Application
45 A Discussion of UCP 600
55 A Discussion of the eUCP
57 S.W.I.F.T. Samples and Comments on Specific Fields
59 Comments on Specific Fields in Preceding Sample
63 Purchase Order-to-Pay Service
67 A Closer Look at Letter of Credit Documents
68 What Are Some of the Typical Documents Required in a Letter of Credit?
81 Frequently Asked Questions
82 A Discussion of the ISBP
84 Documentary Collection for Importers
89 Cash Flow Diagram
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The material presented in this guide is for informational purposes only, and is not intended as an exhaustive treatise on international
banking, nor is it intended to explore all the possible risks involved in using import letters of credit or other services mentioned.
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Overview of Trade Services
What do we mean by trade services?
Trade is a broad term covering a variety of transactions linked to the export and import of goods. Traditional trade
services include letters of credit, international collections and bankers’ acceptances.
What is the history of trade?
The economic history of man has led us from self-sufficiency to division of labor, from provision of bare necessities
to satisfaction of sophisticated needs. The primitive caveman attended only to his own needs, but civilization soon
progressed to a stage in which each individual specialized in what he could do best and exchanged his surplus
output for that of his neighbor. This was the beginning of trade.
When small city-states developed into nations, the need for trade increased. No nation could supply all of its needs
with its own resources. Consequently, these small city-states had to begin trading with one another. What may
have started as barter led to the development of currency, silver and gold coins and eventually to paper notes and
negotiable instruments such as letters of credit.
As far back as the fifteenth century BC, Phoenician traders carried letters of credit to foreign ports in the form of
clay tablets, stamped with the seals of prominent merchants. During the Middle Ages, letters of credit were written
on sheepskins and used extensively by traders such as Marco Polo.
Today business is conducted not only domestically but also abroad. As the search for new markets and lower cost
labor has led to international commerce, so it has led to finding alternative ways to do financial business overseas.
The buyers and sellers in international trade are confronted with diverse geographic, social, economic, and
political conditions. The dynamic interplay of these forces requires the trading partners to assess the risks of the
transaction and to decide how the risks may be reduced or eliminated.
What is the primary role of a bank in international trade?
The primary role of a bank is to provide risk reduction alternatives to both the buyer and the seller. This booklet will
attempt to examine the many facets of international trade from an importer’s, or buyer’s, point of view.
What happens in a trade transaction?
A seller approaches or is approached by a potential buyer. Trade transactions begin with the negotiation of a
contract between a buyer and a seller and end with the exchange of goods or services for monetary payment.
Why do you need Bank of America Global Trade Services?
As noted above, trade can be domestic or international. Clients utilize Bank of America Global Trade Services
specifically to overcome the risks of doing business abroad, where the cultures, regulations, and payment
conventions may differ significantly from those in the United States. In the United States, you could potentially
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perform your own analysis on your potential sellers and with a sense of security close a deal. In this case, your bank
would get involved only in the collection and/or disbursement of funds. Overseas, you need greater protection when
dealing with sellers who are less well known and where you could potentially have limited legal ability to collect for
any loss suffered. Hence, a bank provides up-front financial protection in the form of letters of credit, as well as
offers guidance and support in the use of other forms of payment.
Bank of America works to be a value-added business partner and reaches beyond offering world-class services. We
provide a consultative approach to trade services in which our clients draw from the solid base of experience and
expertise of a dedicated staff eager to propose new ideas.
Understanding Your Payment Options
How will you pay for your shipment?
Nations, companies and individuals have engaged in trade for centuries and, from the beginning, have searched for
the best means of securing payment. Today, an importer has four basic alternatives for providing payment to sellers
of imported goods. Each method addresses certain levels of risk for the buyer and the seller.
Open Account: The seller ships the goods in advance of payment or according to the negotiated terms. In this
instance, the seller relies on the buyer’s good faith that the payment will be made after he has received the goods.
Traditionally, if open account or cash in advance are agreed upon as the payment method, documentation covering
shipment of merchandise is handled outside of banking channels. The banking system at one time was only involved
in the remittance of funds.
Banks are now involved in the facilitation of open account payments, using varying degrees of conditional checking
of original purchase orders against invoices. Bank of America offers a Purchase Order-to-Pay service, with three
levels of data matching. Please see Chapter 4 of this Guide for details. If payment is to be made using a collection or
letter of credit, a bank normally adds its service and documentary expertise on behalf of either the buyer, the seller,
or both. In all cases, the actual movement of funds is done via one of our traditional cash management products
such as direct debit or credit to an account, wire transfer, or check.
Collection: There are two types of Collections: clean and documentary.
• Clean: A clean collection refers to the absence of supporting documentation. A check or a draft is presented for
payment under a clean collection.
— check: Payment by check is typical for domestic open account transactions, but less appropriate for
international transactions. In an international transaction, overseas sellers must give checks to their banks
for collection and conversion to their home currency, a process that can take three to six weeks. A more
satisfactory method therefore is the wire transfer; buyers instruct their banks to arrange for the seller’s bank
account to be credited directly.
— Draft: A draft is an instrument much like an ordinary check in appearance which, in this circumstance, is
used as a formal demand for payment. It is also known as a bill of exchange.
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• Documentary: A documentary collection provides a buyer and seller with a measure of protection whereby a
bank intermediates to exchange payment for documents of title to the goods. The collecting bank releases the
documents, which normally allows the buyer to take delivery of the goods. The bank then either wires the buyer’s
payment to the remitting/seller’s bank for credit to the seller’s account or creates an acceptance (please refer
to Chapter 7 for an explanation of acceptances) covering the transaction. There are two forms of documentary
collections: regular and direct.
— regular: After making a shipment, sellers present the shipping documents to their banks, who in turn send
them to the buyers’ banks for payment or acceptance.
— Direct: The sellers/exporters deliver the documents with a collection letter to the foreign collecting banks
themselves and send copies of the collection letter to their banks for follow-up (tracing and payment
settlement). The collection letter or form is provided to the seller by the seller’s bank and bears the seller’s
bank letterhead and the collection reference number.
Letter of Credit (LC): This is a trade finance instrument issued by a buyer’s bank in favor of a beneficiary/
seller, which substitutes the bank’s credit-worthiness for that of the buyer. In a narrow sense, it is a specialized
instrument used to guarantee payment for a shipment of goods or services fromone party to another. A letter of
credit is payable against conforming documents.
Cash in Advance: The buyer pays in advance of shipment of goods or according to the terms, such as cash on
delivery. As an importer, you most likely will not agree to this option, as you will be out the cash before receipt of the
goods.
What types of agreements are made between the buyer and the seller?
The sales contract is an agreement between the buyer and the seller in which the various terms, conditions and
details of the transaction are specified. Given the complexities of international trade, it is important that the sales
contract state, in terms clear to all parties, the requirements involved in the transaction.
In the simplest form, the sales contract is an accepted order to buy or offer to sell that arises from correspondence
between the buyer and seller. The agreement may be made verbally or in writing. The buyer may initiate the
correspondence by inquiring as to the price and terms of sale for specific merchandise or by simply placing an order
for the merchandise when the price and terms have previously been established.
The sales contract has four main components:
• Description of the goods
• Price
• Method of payment
• Timing of delivery
Although contracts can be verbal, it is highly recommended that they be formalized in writing in all situations.
The sales contract should clearly specify the documents required for any international transaction. The letter of
credit must specify the documents required for payment under the letter of credit. The seller is responsible for
the production and/or procurement of all documents. Documents required under letters of credit will be more
thoroughly discussed in Chapter 5.
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A purchase order is a common vehicle that the buyer uses to place an order for merchandise or services when the
price and terms have previously been established. Unlike a sales contract, it should always be submitted by the
importer or buyer. A purchase order should itemize in precise detail the description of the goods, quantity ordered
with unit description and delivery instructions for each item.
If a purchase order is referred to within the merchandise description of a letter of credit, this can help make the
seller responsible for providing merchandise according to the submitted purchase order. The seller can also be
required to state that merchandise is in accordance with the buyer’s purchase order when submitting documents,
thereby making the seller responsible for the fulfillment of the purchase order. A purchase order can also be
used without a letter of credit for an open account payment. As you will see in Chapter 4 of this guide, Bank of
America now provides an electronic solution for importers who wish to utilize open account payments but want the
assurance of “conditions matching” against their purchase order prior to payment.
How does Bank of America support its Global Trade Services clients?
Bank of America is able to act on many fronts for our clients.
• We act as financial service consultants.
• We provide import and export financial services to our clients.
• We act on clients’ behalf both domestically and overseas via our global branch network.
• We provide various credit services to support clients’ import/export needs.
• We provide economic analyses and forecasts about various countries around the world.
• We listen to our clients’ needs for new technology that will keep them competitive in the world marketplace, and
then we put our experts to work on solutions that meet their needs.
Trade Solutions
What international trade services are available with Bank of America?
As a truly global organization, Bank of America is uniquely positioned with trade services and expertise to serve
clients’ needs in markets worldwide to help them seize international opportunities wherever they arise.
Our services range from trade services and lending to liquidity management, payment services, structured trade
finance, and foreign exchange services. We deliver what client’s organization need to succeed in international
business by offering innovative, tailored solutions, a wealth of trade expertise, the latest in technology, and a
network of offices around the world.
With more than 1,000 trade specialists in over 50 offices worldwide and an extensive international correspondent
bank network, we can provide the global reach and regional expertise to help you accomplish your trade goals.
Bank of America finances international trade through bankers’ acceptances as well as several types of letters of
credit. It also offers various open account, collections and reimbursement services.
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Open Account Services
As you’ll learn in Chapter 4 of this guide, Bank of America and other international banks have been involved in
open account services for years, but at Bank of America we’ve recently added an electronic engine to the process on
our Bank of America Direct® Trade Services platform, providing initiation and reporting on open account payments
as well.
Additionally, Bank of America specialists route international payments as quickly as possible to their final
destination, often by simply crediting one of them any accounts our correspondents keep with us. When you
need documentation sent with your payment, or your supplier prefers checks, our foreign draft service allows
you to draw a check on a local bank in multiple currencies. Our foreign exchange services provide comprehensive
foreign currency payment services, and the ability to purchase competitively-priced spot and forward contracts for
payments on import transactions. Please refer to Chapter 11 of this guide for more information on foreign exchange
and international cash management services offered by Bank of America.
Bankers’ Acceptances
A bankers’ acceptance is a negotiable instrument that is drawn on, and accepted by, a bank to finance a trade-
related transaction. It is often a relatively inexpensive way to finance trade transactions.
Bankers’ acceptances are versatile and can be used for several purposes: acceptances can cover both documentary
letters of credit (Documentary BAs) and open account transactions (Clean BAs). They can finance imports, exports,
and domestic transactions.
Acceptances offer a source of funds at competitive rates since banks are not required to provide reserves for
financing such transactions. Acceptances are very liquid—they can readily be sold in secondary markets.
• non-Discounted Bankers’ acceptances—Bank of America either creates and accepts or accepts a time draft
drawn on us which relates to a specific financial transaction in which our client is involved. We are obligated to
pay the specified amount on the maturity date of the draft. Our obligation for payment to any holder of the draft
at maturity date is unconditional, independent of the underlying financial transaction.
• Discounted Bankers’ acceptances—Bank of America creates or accepts, and discounts, a time draft drawn on us
which relates to a specific financial transaction in which our client is involved. The drawer is paid at the time
of acceptance of the draft, less fees and discount charges. The discount rate applied is based on the market
rate that investors in the secondary market are paying for drafts of various tenors and amounts; this rate
fluctuates daily. In recent years the cost of financing on an acceptance basis has generally been lower than
prime-rate-based lending.
Letters of Credit
A letter of credit is an instrument issued by a bank by which the bank substitutes its obligation to pay the seller for
the obligation of the buyer, on specified terms. Letters of credit have many variations.
• Standby letters of credit
“Standby letter of credit” is a term used for the type of letter of credit that functions like a guarantee. Standby
letters of credit usually provide a type of monetary assurance to compensate a beneficiary in the event of
noncompliance by the applicant with the terms of a contract. They are often used instead of cash deposits or
as performance or bid bonds in international and domestic transactions. Like other letters of credit, standby
letters of credit provide a bank’s name and credit support for a specific transaction. In a standby letter of
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credit, the beneficiary looks first to the account party for payment before seeking payment from the bank.
Standby letters of credit can cover either financial, performance or trade-related transactions.
• financial Standby letters of credit
We issue a standby letter of credit for our client or add our confirmation to a standby letter of credit issued
by a correspondent bank. Financial obligations involve repayment of funds borrowed or advanced in the
event the applicant fails to do so. In effect, we substitute our own credit standing for that of our client (or our
correspondent bank) and assure that payment will be made in the event of default.
• performance Standby letters of credit
In this type of obligation, we assure compensatory payment to the beneficiary in the event that the applicant
does not perform the contractual agreement the applicant has entered into with the beneficiary. We add our
credit standing to that of our client (or our correspondent bank) and assure that payment will be made in the
event of default under bid bonds or performance bonds.
• commercial letters of credit
Commercial letters of credit involve payment in exchange for compliant documents required under a letter of
credit, relative to goods shipped or services performed. The beneficiary obtains payment from the issuing bank
or confirming bank (if any). Import and export letters of credit are types of commercial letters of credit.
• import letters of credit
We issue a new documentary letter of credit for our client. By doing so, we substitute our own credit standing
for that of the buyer and assure that payment will be made to the seller if terms and conditions of the letter of
credit have been fulfilled.
• export letters of credit
Export letters of credit, when properly executed, may help protect an exporter’s (beneficiary’s) interests against
the risk of losing title to the goods until they are paid. Bank of America assists with the structuring of letters of
credit, arranges for their confirmation and identifies discrepancies in documents that may delay payment.
• Confirmed Export Letters of Credit
Another bank, usually one of our correspondents, issues its own letter of credit and asks us to authenticate it,
add our confirmation to it and advise it to the beneficiary. When we confirm another bank’s letter of credit, we
add our credit standing to that of the issuing bank and guarantee that payment will be made to the seller if
terms and conditions of the letter of credit have been fulfilled.
• Unconfirmed Export Letters of Credit
A bank, usually the applicant’s bank in the country of the applicant of the letter of credit, issues its own letter
of credit and asks us to authenticate it and advise it to the beneficiary without adding our own confirmation.
Deferred Payments
• import lc Deferred payments
Deferred payments are created under import letters of credit that we issue for the applicant, our client. We
are obligated to make payment on the designated maturity date. As no draft, or negotiable instrument, exists
under a deferred payment letter of credit, the beneficiary cannot obtain payment prior to the maturity date.
There is no draft to discount. See this guide’s section on page 92 for more information about drafts.
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• Confirmed Export Deferred Payments
Payments under letters of credit issued by correspondent banks are postponed (after presentation of
documents) for periods of time as stipulated in the letter of credit. If we add our confirmation to the
correspondent bank’s letter of credit, we are obligated to make payment on the designated maturity date
whether or not the funds have been made available to us by the issuing bank. The advantage of a negotiable
instrument in the form of a draft does not exist and, therefore, the beneficiary cannot obtain payment prior to
the maturing date, as there is no draft to discount. See this guide’s section on page 92 for more information
about drafts.
• Unconfirmed Export Deferred Payments
As in the case of unconfirmed letters of credit, we will pay only when and if funds have been made available
to us by the issuing bank. The advantage of a negotiable instrument in the form of a draft does not exist and,
therefore, the beneficiary cannot obtain payment prior to the maturing date, as there is no draft to discount.
See this guide’s chapter on page 92 for more information about drafts.
Reimbursements
• Unconfirmed Reimbursements
An issuing bank authorizes Bank of America to debit its account and to pay claims made by paying, accepting
or negotiating banks. We will make such payments only if the issuing bank has sufficient funds on deposit with
us to cover the claim.
• Confirmed Reimbursements
An issuing bank asks Bank of America to confirm its obligations under a letter of credit it has issued and
authorizes us to debit its account and to pay claims made by paying, accepting or negotiating banks. By adding
our confirmation, we add our bank’s creditworthiness to that of the issuing/authorizing bank and are obligated
to make payment whether or not the issuing/authorizing bank has sufficient funds on deposit with us to cover
the claim.
Air Release
Bank of America issues our indemnity on behalf of and for the account of our client in favor of an airline for the
purpose of authorizing the carrier to release a shipment of goods when the air waybill has been consigned to
the bank. In return for our issuing the indemnification on our client’s behalf, our client must provide us with an
indemnity in our favor. This arrangement pertains to import letters of credit and incoming collections.
Shipside Bonds/Steamship Guarantees
Bank of America issues our indemnity on behalf of and for the account of our client in favor of an ocean carrier
for the purpose of authorizing the carrier to release a shipment of goods without the normally required shipping
documents. In return for our issuing the indemnification on our client’s behalf, our client must provide us with an
indemnity in our favor. This arrangement also pertains to import letters of credit.
Collections
• incoming clean Domestic collections
Bank of America receives a clean collection from a domestic bank. We will serve as collecting bank and
communicate with the drawee, usually our client, to facilitate payment to the remitting bank.
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• incoming clean international collections
Bank of America receives a clean collection from a foreign bank. We will serve as collecting bank and
communicate with drawee, usually our client, to facilitate payment to the remitting bank.
• outgoing clean Domestic collections
Bank of America opens/sends a request for payment to a domestic collecting bank at the request of our client.
When paid by the collecting bank, we will remit funds to the drawer (our client).
• outgoing clean international collections
Bank of America opens/sends a request for payment to a foreign collecting bank at the request of our client.
When payment is received from collecting bank, we will remit funds to the drawer (our client).
• incoming Documentary collections
Bank of America receives a documentary collection from another bank. We will serve as the collecting bank
and communicate with the drawee, usually our client, to facilitate payment to the remitting bank.
• outgoing Documentary collections
Bank of America opens/sends a request for payment of documents to a collecting bank at the request of our
client. When paid by the collecting bank we will remit funds to the drawer (our client).
• export Bills collections
Bank of America creates a collection instrument for tracking and receiving funds due a correspondent bank in
exchange for documents sent to a third bank. Delivery of documents may be an integral part of the service.
Trade Acceptances
A trade acceptance is a time draft that is accepted for payment by a party other than a bank—usually the buyer.
This could apply to any of the types of collections, as defined above.
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Risks
Trade involves buyers and sellers seeking to exchange goods or services despite their differences in language,
national custom, credit procedures and accounting practices. Merchants have always had, and continue to seek,
ways of minimizing the risk of non shipment and/or risk of nonpayment. Following is a chart comparing the
payment terms.
Table 1.1: Comparison of Payment Terms with Relative Risk*
Goods Available Timing of Payment
Method of Payment to Buyer to Seller Risk to Buyer Risk to Seller
Sight Letter of Upon settlement When documents Has assurance of Very little or none based
Credit of LC unless goods have been presented shipment but relies on conditions in the LC and
consigned direct to and found to comply on seller to ship provided no discrepancies
buyer with LC terms goods as described in between documents and LC
(normally after the documents
shipment)
Time (Usage) Letter Upon the bank Upon maturity of Actual payment Very little or none, based
of Credit releasing documents payment terms, or (regardless of product on conditions in the LC and
of title, unless goods upon discounting of a quality) is due after provided no discrepancies
consigned direct to bankers’ acceptance possession of goods between documents and LC
buyer
Sight Draft for After payment unless Upon presentation of Has assurance of Possible nonpayment by
Collection DP1 goods consigned draft and documents shipment but relies buyer
direct to buyer to buyer on seller to ship
goods as described in
the documents
Time Draft for Upon acceptance of Upon maturity of Buyer undertook Possible nonpayment by
Collection DP2 time draft, unless time draft trade obligation to pay buyer at maturity of trade
goods consigned acceptance when accepted time acceptance (buyer has
direct to buyer draft; relies upon possession of the goods)
seller to ship goods
as described
Open Account Upon delivery
Upon payment of None Full reliance on buyer to pay
invoice invoice as agreed
* None of these payment methods protect against fraud. This chart is provided for information and illustration only. It does not purport to
encompass all of the possible risks to a buyer or seller involved in any given trade transaction.
1 DP1 Also known as Documents Against Payment or Cash Against Documents (CAD).
2 DP2 Also known as Documents Against Acceptance, Time Draft, and Trade Acceptance..
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What are some of the decision factors used in determining payment terms?
When do the goods pass from the seller to the buyer and when does payment occur? Can you, as a buyer, trust the
seller to deliver promptly with the correct goods if you have already paid for the merchandise (cash in advance
terms)? Are you willing to pay promptly if goods are shipped first (open account terms)? The answer to these
questions will depend on how well the parties know each other. This knowledge can be gained through experience or
research. Alternatively, intermediaries can be used to mitigate the risks; this has been the traditional role of banks.
The choice of method of payment (means by which the buyer will pay the seller) takes into account several factors:
• Physical location of buyer and seller
• Extent of competition from other sellers
• Level of personal knowledge or prior experience between the buyer and seller
• Availability of other buyers
• Accounting, payment and regulatory restrictions between countries
• Reputation of buyer and seller
• Creditworthiness of buyer and seller
• Customary practices in the individual country or industry
• Dollar amount of transaction
• Urgency to receive payment
What are the risks associated with making the payment?
The importation of goods from foreign markets involves greater risks for you as an importer than those associated
with domestic trade. While in domestic trade, you may be willing to pay “cash in advance” due to good credit
information, reliable bank checks, easy communication and an understandable legal system. You will often require
greater protection in international trade.
The documentary collection and the letter of credit are two such alternatives to open account and cash-in-advance
methods of payment. Both of these alternative methods of payment protect the buyer and the seller from losses in
varying degrees and offer both the buyer and the seller varying degrees of convenience in making payments. In
general, the greater the protection for the buyer, the less convenient and the more costly the payment terms are for
the seller.
One of the most important determinants of the payment method to be utilized in any particular transaction is the
level of risk in the transaction. You, as buyer, must always weigh the risks and the amount of protection desired
against being noncompetitive within your market. During the negotiation process, both sides must:
• Analyze the major risks they encounter in international trade transactions
• Review alternative payment methods, the levels of protection and the types of financing provided with each one
• Understand the various factors that must be considered in the formulation of a sales contract
• Understand international credit policy as related to the transaction
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What overriding risks are always factors to consider?
• commercial risk
As a buyer, you are primarily concerned with whether sellers can and will ship the goods. You need to
determine if sellers have the ability to produce or obtain the goods, as well as whether they will ship the
products in a timely fashion. Not only do you need to know if they will ship, you are also vitally interested in
knowing if the goods will be of the quality and quantity ordered and expected. To help mitigate commercial
risk, you can investigate your sellers’ trade references from other buyers (whose names you have requested
from the supplier) and/or through local World Trade Centers or Chambers of Commerce.
• political and economic risk
You should also familiarize yourself with information concerning the economic and political stability of the
country in which you’re doing business. This information should also include current and future trends of the
country’s economy, political situation and the possibility of the implementation of exchange controls. Bank of
America economists follow the economic and political situations in most countries very closely and can be an
excellent source for this type of information. Other sources are foreign country consulate offices and various
publications produced by Dun and Bradstreet International, the U.S. Department of Commerce International
Trade Administration, Moody’s, local Chambers of Commerce or World Trade Centers.
Economic and political risks you might want to be aware of are: cancellation of export licenses due to currency
freezes, hostile laws and court systems, civil war, boycotts and sanctions, confiscation of merchandise,
currency devaluation, liquidity problems and implementation of exchange controls.
Which are the riskiest payment methods?
Cash in Advance is riskiest to the buyer. Open Account is riskiest to the seller. You must weigh the pros and cons of
using the various payment methods against the risks. The chart below should help to visualize the risks.
Payment Method Risk
risk to Seller risk to Buyer
RISkIEST
Open Account
Documentary
Collection
Letter of Credit
Cash in Advance
RISkIEST
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How do you determine the appropriate payment option?
In addition to the very important payment and shipment risks, the following chart gives some guidelines on
determining which payment options may be appropriate for a particular trade transaction. Please note that the key
determinants are: Relationship, Type of Goods (stock or custom), Political and Economic environments, and the
importance of Timely Cash Flow and Delivery.
Table 1.2: Payment Options
Documentary
Cash in Advance Letter of Credit Collections Open Account
Relationship New New Established Established
Type of Goods Custom made Custom made Stock items Stock items
Political Unstable Unstable Stable Stable
Economic Unstable Unstable Stable Stable
Timing of Cash Yes Yes No No
Flow and Delivery
What are the advantages of letters of credit to the buyer (importer)?
Buyers can benefit in the following ways:
• Buyers usually do not have to tie up working capital prior to actual shipment of merchandise
• Letters of credit allow for flexibility in documentary requirements
• Buyers are assured that their bank will pay the seller only when the seller’s documents conform to the terms
and conditions of the letter of credit
• Letters of credit offer the opportunity to receive extended payment terms from the seller, by arranging for a
letter of credit that is payable at a future date
• Letters of credit provide the ability to delay payment until documents are received
• This type of payment mechanism enhances the buyer’s ability to plan sales and distribution because latest
shipping date is known
• Barring supplier fraud, payment is limited to what was ordered
• Bank of America can issue letters of credit denominated in foreign currency, which enables the buyer to comply
with seller’s request for payment in foreign currency.
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What are the risks of letters of credit to the buyer?
Letters of credit deal only in documents, not in goods. The major risk may be that the merchandise may not be as it
is represented in the documentation.
What are the advantages of letters of credit to the seller (exporter)?
Sellers can benefit in the following ways:
• Minimized credit risk by shifting risk from the buyer to the buyer’s bank
• Reduced commercial/political risk by shifting it from the buyer to the buyer’s bank
• Provides assured and prompt payment by reducing the risk that payment for the goods might be delayed or
otherwise jeopardized by political or foreign exchange problems in the buyer’s country
• Improved ability to obtain bank financing.
What are the risks to the seller?
The seller’s documentation must conform exactly to the terms and conditions of the letter of credit to ensure
payment.
What about the risk of fraud?
Since the beginning of time, buyers with specific needs have been approached by sellers who claim to be able to
fulfill those needs, but have no intention of doing so.
As markets in certain countries tighten and economies in these countries suffer, fraudulent schemes will be
increasing. These schemes will proliferate particularly in countries with few or no exchange controls, weak legal
systems and an inability to use their resources in the global mainstream. Please refer to pages 32—34 of this guide
for information about Bank of America’s procedures and policies that attempt to prevent fraud, money laundering
and other illegal activities.
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015Bank of america merrill lynch SolutionS for importerS
Chapter 02
Working with Your Bank
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Chapter 02
Working with Your Bank
Bank of america merrill lynch SolutionS for importerS
Chapter 02
Working With Your Bank
As an importer, you know that sourcing products globally can lower costs, broaden product lines, and diversify
sources of supply. You also know the challenge of getting the right product to the right place the right time.
Different time zones, languages, and business practices hinder communication. Lengthy shipping times and
customs clearances complicate inventory management. And the payment terms demanded by overseas suppliers
can tie up your credit and slow down the flow of documents needed to clear merchandise through customs. You
need specialized banking services to help overcome these obstacles. You need a bank with seasoned experts in
international trade and a family of specialized banking services tailored to the unique needs of the importer.
You need Bank of America Import Services
Bank of America Import Services offers you a comprehensive array of services; services that can help you receive
products quicker, reduce the amount of credit you have to tie up, and ease your administrative burdens. Our
network of correspondent banks is extensive, allowing us to work directly with your supplier’s banks. With this
worldwide network of correspondent banks, Bank of America can help you access almost any market.
Payment options to meet your needs
Bank of America stands ready to assist you with a full range of payment options. Our international trade specialists
can assist you in selecting the option that best fits the needs of both you and your vendors. Whether you are buying
on open account, with cash against documents or on a letter of credit basis, we have the resources and the expertise
you need. And we deliver our services in almost any currency you might choose. Our specialists are dedicated to
handling your transactions as efficiently and as smoothly as possible.
Accessible expertise
Bank of America has more than 1,000 experienced international trade specialists dedicated solely to the
management and growth of our clients’ international business. Strategically located from coast to coast in the
United States and in various foreign locations, we travel extensively to keep in touch with clients. Our expertise in
structuring import transactions offers you the kind of knowledge and experience you need.
Bank of america merrill lynch SolutionS for importerS
Chapter 02
Working with Your Bank
Innovative services developed as needs change
Bank of America has developed a forward-looking suite of electronic banking services, allowing importers to initiate
transactions and receive reports via the Internet with the use of Bank of America Direct® Trade Services. By fully
integrating electronic applications into our global issuance system, we can issue your letters of credit faster and
more accurately. Take advantage of the trade module, Trade Services, to:
• Increase processing efficiency and decrease processing errors
• Easily share trade data critical to business partners both within other areas of your organization and with
outside partners such as freight forwarders and customs brokers
• Have better and faster access to your global trade activity and information
• Enjoy round-the-clock access to your trade information no matter where you’re located.
As a premier provider of cash management services, Bank of America has developed innovative sweep accounts and
automatic investment services to keep your money working longer for you.
An extensive network
Our correspondent bank network is able to handle almost any import transaction efficiently. Over the past thirty
years we have carefully developed and cultivated an extensive network of correspondents worldwide. Our network
allows us to deal directly with your vendors’ banks, saving you time and money. Our in-depth knowledge of overseas
markets and business practices can be invaluable to importers seeking to structure unusual transactions.
Services to Meet the Diverse Needs of the Importer
Open Account
Lowering fees and streamlining financial supply chain processes are a top priority for most buyers. At the same
time, ensuring vendors have financing options similar to those associated with traditional letters of credit is an
important consideration. Bank of America is committed to developing solutions to assist buyers in optimizing
and integrating their supply chains. Our open account payment solutions help clients re-engineer their trading
processes and unlock substantial amounts of working capital for their company and their trading partners.
Bank of America has enhanced its Bank of America Direct® Trade Services to handle purchase order advising,
tracking and reconciliation for letter of credit and open account payments. Our goal is to integrate letters of credit,
documentary collections and open account trade payments seamlessly into each customer’s preferred electronic
delivery channel. A complete description of this service is provided in Chapter 4 of this guide.
Documentary Collections
Many clients find that suppliers who initially ask for cash in advance or a letter of credit may be willing to sell on
a documentary collection basis. Commonly referred to as “cash against documents” or as “sight draft” terms, this
payment mechanism allows foreign vendors to instruct Bank of America to retain control of the shipping documents
until payment is made or their draft is accepted. By routing Documentary Collections through Bank of America,
vendors are assured that a world-class bank is following their instructions. Our clients benefit by not having to
prepay for the product or tie up their credit.
Bank of america merrill lynch SolutionS for importerS
Chapter 02
Working with Your Bank
Letters of Credit
Letters of credit continue to be one of the most common payment options used in international trade, especially for
imports from Asia and Latin America. Bank of America has international trade specialists to help you structure
your letters of credit and a correspondent bank network that can get the letter of credit to your supplier as quickly
as possible.
As one of the largest issuers of letters of credit in the world, Bank of America has invested in electronic application
systems that free our clients from retyping any of the standard clauses in their letters of credit. Using a standard
Web browser, you supply only the details specific to the particular transaction and send the application to us via the
Internet. Your Web-based electronic applications are fully integrated into our issuance system for truly superior
response time and accuracy. This same system gives you activity and status reports, available on your personal
computer at your convenience.
Letters of credit are primarily oriented toward protecting the interests of beneficiaries. No letter of credit can
protect the buyer against fraud. Protection in any import transaction is contingent upon the performance of
the exporter, and there is no substitute for knowing the reputation of your supplier. However, Bank of America’s
international trade specialists can help structure your credits to better protect your interests. When appropriate,
performance bonds, inspection certificates, insurance policies, and more specific shipping schedules can be
incorporated into your credits, giving you additional control over the transaction. Our specialists can advise you as
to when a standby letter of credit might be an appropriate way to assure payment to a vendor. Whenever you need
help in structuring your letters of credit, you can rely on Bank of America.
Easy L/C®
When you’re involved in global trade, the need for letters of credit isn’t limited by the size of your company. Smaller
companies often have modest credit needs and straightforward shipping arrangements, but they shouldn’t have
to navigate the same complex and time-consuming application, underwriting, and approval processes as larger
companies seeking letters of credit with more complicated requirements and higher dollar values.
If your import credit needs do not exceed $100,000.00 and you have an account with Bank of America, Easy L/C
offers a simplified application form and streamlined approval process, which reduces turnaround time and can save
you money with a low front-end fee.
The application is short and simple to complete. We can even send it to you in electronic format to get your
application off to the fastest start possible. Your letter of credit is generally approved and issued within 24 hours.
Bank of America doesn’t require a secured deposit as collateral for your Easy L/C. It’s prepaid from the cash in your
company’s existing Bank of America account.
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Chapter 02
Working with Your Bank
Cash Secured Letters of Credit
Cash secured letters of credit are secured by funds that you have in an appropriate Bank of America deposit
account for the balance and term of the letter of credit. Cash secured transactions are subject to credit approval;
collateral advances can be made on balances on hand subject to financial information verification.
Bankers’ Acceptance Financing
Whether you buy on open account with documentary collections or through letters of credit, Bank of America
can finance your imports with bankers’ acceptances. These short-term, fixed-rate instruments can significantly
lower your financing costs. As part of letter of credit transactions, bankers’ acceptances can give you extended
terms, allowing your vendors to maintain their cash flow by discounting the instrument at what is normally a very
favorable rate. Your vendor can pay some or all of the financing costs. Borrowing procedures and documentation are
simple and straightforward.
Private Labeling of Letters of Credit
Bank of America provides private labeling of letters of credit to qualifying clients. Your company becomes the
issuer of letters of credit using an existing subsidiary suitable for the purpose or a new “Special Purpose Vehicle”
company. Bank of America provides the same level of operational support for these letters of credit as provided
when we are the issuer of the letters of credit.
Private labeling would allow you to significantly reduce your reliance on bank credit, lower letter of credit charges,
improve service to your vendors, and improve the efficiency of the process through the intelligent use of technology.
Our solutions are designed to give you the choice of how you want to structure the processing of private-labeled
letters of credit, and how you would like to structure the financial side of these transactions as well. Additionally,
because of our comprehensive and aggressive vendor financing program in Asia, our local trade officers can meet
with your vendors, help them prepare for your private-labeled letters of credit, and discuss their financing needs if
appropriate.
Soft Restriction Program
Our soft restriction program is designed to assure that Bank of America is involved on both the import and export
side of a letter of credit transaction, thus reducing processing time. When a new commercial letter of credit is
issued to a beneficiary in Asia, the letter of credit contains wording that restricts negotiation of the letter of credit
to one of our Asian banking centers. When documents under these letters of credit are presented to our Asian
banking center, we are able to eliminate the duplicate step of document examination.
With this program we create both tangible and intangible value for all involved parties. Applicants will realize the
advantages of a streamlined import process due to a lowered discrepancy rate, reduced vendor noise because of
lower product cost, faster processing and better control over transactions. For vendors, local bank representatives
who are familiar with their accounts can assist in eliminating discrepancies. This will provide faster turn-around
times, resulting in increased working capital velocity, lower interest costs and lower transaction costs with more
efficient processing.
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Chapter 02
Working with Your Bank
Supply Chain Financing
Buyers often mandate that their suppliers extend payables terms and move from letters of credit to private label
letters of credit or open account terms. This can place significant financial pressure on suppliers who rely on letters
of credit to meet their working capital needs. Buyers are now beginning to recognize the need for alternatives that
enable their suppliers to obtain financing as an inducement for accepting extended terms. By recognizing their
suppliers’ need for financing, buyers can reduce cost of goods sold (COGS), more efficiently manage working capital
and strengthen supplier relationships.
Bank of America offers a comprehensive suite of supply chain financing programs that enable buyers to provide
their suppliers with access to credit.
Foreign Exchange Services
Bank of America Foreign Exchange Services give you the option to pay your vendors in their own currency. We
provide a full range of foreign exchange services, from simply sending wires denominated in foreign currency
to helping corporate clients develop and execute sophisticated hedging strategies. In addition to competitively-
priced spot and forward contracts, options, and futures, our foreign exchange traders can offer information about
market trends that can help you plan your foreign exchange strategy. Our London and Singapore foreign exchange
operations assure an around-the-clock capability.
Cash and Treasury Management Services
Bank of America Treasury Management Services help you manage your cash position and cash flow. We
build comprehensive, customized solutions to meet the unique needs of our clients, improve their financial
competitiveness, and make their treasury functions more efficient.
Working together, we can help you streamline the way you make payments, collect your receipts, and reconcile your
accounts worldwide. With our broad treasury management suite of services, we guide you through the steps to
make your treasury functions more efficient.
Small Business Services (Trade Client Services)
There may have been a time when you didn’t think your company could import merchandise from overseas or sell
your goods abroad. Not any more. For companies like yours, great business opportunities lie beyond our country’s
borders. And isn’t opportunity exactly what you seek for your company?
Trade Client Services is made up of a team of trade finance professionals with many years of experience. They’re
waiting for your call and the opportunity to help you find working capital solutions for your organization. Trade
Client Services has been organized to cover all U.S. time zones, so you’ll easily and conveniently be able to speak
with a representative personally.
Bank of america merrill lynch SolutionS for importerS
Chapter 02
Working with Your Bank
Let Bank of America Introduce a Few Ways You Can Increase
Opportunities
Economic forecasting and industry specialists
At http://corp.bankofamerica.com portal, click on “Investment Solutions” to find the latest economic and industry
analyses. Banc of America Securities economists, based in New York, Hong Kong and London, analyze and forecast
U.S. and international economic conditions and financial market trends and post their findings on this site.
The coverage includes analysis of macroeconomic indicators, forecasts of interest and foreign exchange rates, and
perspectives on government policies. This work, coupled with research on emerging markets, fixed income, foreign
exchange and global risk, supports a wide variety of Banc of America Securities’ capital markets and client-focused
activities.
In the end it’s all about the people—Superior client satisfaction
We recognize that you have many choices in banks and that, in the final analysis, service will drive whether you
continue to use Bank of America. It’s for that same reason that your customers continue to do business with you.
We strive to maintain a professional and skilled international banking staff in every office location. Furthermore,
we are extremely sensitive to the unique needs of each client. We pride ourselves on a high level of personalized
service built on a long-term relationship.
Bank of America has extensive involvement with large retail and consumer companies, and therefore is familiar
with the seasonal fluctuations that are prevalent in these industries. Our global trade offices are staffed effectively
to manage these peak cycles by proactively working with the client to know exactly when these fluctuations will
occur during the year. We understand that there are critical times in each client’s business cycle and are committed
to constantly providing consistent quality service.
A global team of trade associates is typically established to meet our client’s specific processing requirements.
Bank of America will assign a primary operations contact that is responsible for technical consultation and
ensuring compliance with each client’s service requirements.
In June 2000, Bank of America was proud to receive the International Organization for Standardization (ISO) 9001
certification in recognition of the rigorous quality standards set and achieved by the bank throughout its Asia
Operations Center in Hong Kong.
In the past few years independent research firms have conducted client satisfaction interviews with Bank of
America import letter of credit clients located throughout the United States. Performance measurement categories
included timeliness, accuracy, capability, staff knowledge/servicing, technology and client loyalty. Nearly ninety-
six percent of our clients reported that they were either very satisfied (highest possible rating), satisfied, or
somewhat satisfied with Bank of America’s overall import letter of credit service. Our Global Trade Services
business is committed to moving to and maintaining a Six Sigma level of client service, and numerous performance
measurements are in place to that end.
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Chapter 02
Working with Your Bank
Depend on Bank of America
Your business is filled with unique and diverse challenges; challenges that demand creative, flexible and
comprehensive solutions. To help you find these solutions, you need a partner who has extensive experience,
overseas expertise and a wealth of resources. You need Bank of America Import Services. We can provide you
with a complete range of payment options and a worldwide correspondent network. We’ll take the time to help you
determine how you can make your international business run as smoothly, efficiently and profitably as possible. We
will also be ready to help you re-evaluate your options as your needs change. For further information, contact your
local Bank of America Global Trade & Supply Chain Solutions officer.
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Chapter 03
Import Letters of Credit Defined
023Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 03
Import Letters of Credit Defined
Chapter 03
Import Letters of Credit Defined
An import letter of credit is a conditional payment mechanism under which the issuing bank irrevocably promises
to pay the seller if presented documents comply with all of the letter of credit terms and conditions. The issuing
bank substitutes its credit for that of the buyer.
All letters of credit have similar attributes and this section will restate some of those attributes. It is important not
only to understand the attributes, but also the underlying principles.
A commercial letter of credit offers protection to both the buyer and seller and, for this reason, is often used as a
means of payment. A letter of credit offers the buyer a high degree of assurance that goods and services will be
delivered and reduces trading risks. In the letter of credit process, the bank is the intermediary between the seller
(an exporter) and the buyer (an importer). The issuing bank issues the letter of credit on behalf of the importer,
examining the documents received, to ensure conformity to the terms and conditions of the letter of credit. If the
documents are correct, the bank makes payment, either immediately or at a specified future date.
When the bank issues the letter of credit, it substitutes its credit for that of the importer. In doing so, bank
promises to pay the exporter upon presentation of documents in good order. The bank deals only with the
documents called for in the letter of credit, not with the actual goods involved. For example, if a letter of credit
specifies that the exporter ship a container of steel and the quality of the steel does not meet the buyer’s
expectations, the exporter will nevertheless be paid as long as documents are presented in conformity with the
terms and conditions of the letter of credit.
Typically the exporter’s bank acts as the advising, examining and paying bank. It may also confirm and negotiate
letters of credit on its client’s behalf.
Prior to any letter of credit transaction, the buyer and seller should negotiate and agree to the terms and conditions
to be specified.
Bank of America can help structure your import letter of credit and suggest terms that are favorable and achievable
to both you and your suppliers. This facilitates LC compliance, which ensures that you receive your commercial
shipment according to the terms agreed upon without delay.
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Chapter 03
Import Letters of Credit Defined
Letter of Credit Flow Chart
Buyer
issuing /
Buyer’s Bank Seller’s Bank Seller Buyer
02 03 04 0501
STEP ONE STEP TWO STEP THREE STEP FOUR STEP FIVE
Buyer Applies Buyer’s Bank Transmits LC to Advises LC to Goods Produced
for Letter of Issues LC and... Seller’s Bank Seller and Shipped
Credit
Seller
Seller’s Bank
issuing /
Buyer’s Bank
Buyer
06 07 08 09
STEP SIX STEP SEVEN STEP EIGHT STEP NINE
LC Presented to Seller’s Bank Issuing Bank Issuing Bank Debits
Seller’s Bank Examines Examines Buyer’s Account and
with Required Documents and Documentation Releases LC Documents
Documentation Sends Making Funds Available
Documents to for Payment to Seller
Issuing Bank
10
Seller Buyer
STEP TEN
Buyer Exchanges
Documents for Goods
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Chapter 03
Import Letters of Credit Defined
Letter of Credit Flow Chart—Steps 1 Through 4
Buyer
issuing /
Buyer’s Bank Seller’s Bank Seller
02 03 0401
01
02
03
04
STEP ONE STEP TWO STEP THREE STEP FOUR
Buyer Applies Buyer’s Bank Transmits LC to Advises LC to
for Letter of Issues LC and... Seller’s Bank Seller
Credit
The buyer fills out a letter of credit application that satisfies the terms of the purchase agreement plus the
requirements of customs law, shipment and document coordination.
The issuing bank, usually the buyer’s bank, rechecks the application to ensure that it is complete and
workable.
The issuing bank transmits the credit to a correspondent bank by telex, S.W.I.F.T. or (rarely) airmail and
asks them to advise and/or confirm the instrument.
The correspondent bank receives the letter of credit, checks for authenticity, records the transaction and
transmits the instrument to the seller/beneficiary, adding their confirmation if requested. Upon receipt of
the letter of credit, the seller should carefully review it to determine whether its performance requirements
can be complied with and whether it is acceptable from a credit perspective.
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Chapter 03
Import Letters of Credit Defined
Letter of Credit Flow Chart Steps 5 Through 7
Seller Seller’s Bank Seller
issuing /
Buyer’s Bank
05 06 07
STEP FIVE STEP SIX STEP SEVEN
Goods Produced Documents Seller’s Bank Examines
and Shipped Presented to
Seller’s Bank
Documents and Sends
Documents to Issuing Bank
05
06
07
Upon determination that the letter of credit is acceptable, the seller should ship the goods precisely
consistent with its terms and conditions.
The seller must prepare documents exactly as required and present them to the proper paying bank. The
proper paying bank may be any bank specified in the credit to accept, pay or negotiate. This may be the
advising bank, confirming bank, issuing bank or (on a freely negotiable credit) any bank that is willing to
negotiate.
When the paying bank receives the documents, it will examine them to determine if they are in order
pursuant to the credit’s terms and conditions. If in order, the bank may pay, accept, or negotiate as required
by the letter of credit. The negotiating bank will transmit the documents to the issuing bank and request
reimbursement. Under an LC payable at sight, the issuing bank may effect reimbursement to the seller’s
bank by remitting funds directly to the seller’s bank, authorizing the seller’s bank to debit the issuing bank’s
account, or by authorizing the seller’s bank to claim from a third bank where the issuing bank maintains an
account.
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Chapter 03
Import Letters of Credit Defined
Letter of Credit Flow Chart Steps 8 Through 10
issuing /
Buyer’s Bank
08
Seller’s Bank
issuing /
Buyer
Buyer’s Bank Seller
09 10
STEP EIGHT STEP NINE STEP SEVEN
Issuing Bank Examines Issuing Bank Debits Buyer’s Account Seller’s Bank Examines
Documents and and Releases LC Documents, Documents and Sends
Reimburses Bank Seller Receives Payment Documents to Issuing Bank
08
09
10
Upon receipt of the documents, the issuing bank will examine them to ensure that they are in order as
specified and then reimburse the negotiating bank. For time drafts, reimbursement is made at maturity of
the bankers’ acceptance.
Issuing bank debits buyer’s account and releases documents. For a time draft, the buyer’s account will be
debited at maturity. Seller’s bank pays exporter after being reimbursed by buyer’s bank.
The buyer exchanges the shipping documents for the goods.
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Chapter 03
Import Letters of Credit Defined
Frequently Asked Questions
What is a letter of credit?
A letter of credit is a financial instrument issued, generally by a bank, to an individual or corporation by which
the bank substitutes its own creditworthiness for that of the individual or corporation. Letters of credit facilitate
importing and exporting by assuring the seller/exporter’s payment for goods sold against compliant documents.
Without such assurances of payment, foreign trade would be severely curtailed.
Why should I use letters of credit when importing?
Companies purchasing materials, supplies and services from domestic suppliers generally have established trade
credit and can buy on open account terms. In international trade, it is more difficult to establish trade credit,
especially with new relationships. Generally, the foreign seller will require either cash in advance or a commercial
letter of credit. The letter of credit assures the seller that payment will be received, and it may help the seller obtain
financing for the production and shipment of the goods being purchased. In addition to improving your cash flow,
the letter of credit gives you some protection because payment will not be made without presentation of all required
documents. Those documents must also comply with the terms of the letter of credit. However, the letter of credit
does not eliminate the need for you to check out the foreign seller’s ability to produce, as well as his integrity and
business reputation.
Other than my banker, who else should I be using as a resource?
In addition to your Bank of America Trade specialist, you can obtain assistance from a great number of sources—
both public and private. The type of business in which you are engaged and the international expertise of your
existing staff will determine who you should use. Some of the more commonly used resources for obtaining
importing expertise include:
Government Private
Foreign consulates and commercial attachés Trade banking specialists
U.S. diplomatic personnel International lawyers
U.S. Customs personnel Customs brokers
A good customs broker is frequently the key to successful importing and should be contacted before finalizing any
contracts
Bank of america merrill lynch SolutionS for importerS
Chapter 03
Import Letters of Credit Defined
What agreements are involved in an import letter of credit transaction?
01. Sales contract. Agreement between the buyer (account party or applicant) and the seller (beneficiary) which
gives rise to the use of a letter of credit.
02. purchase order. The buyer’s order to buy, usually describing merchandise to the unit level of detail. A
purchase order is normally submitted directly to the seller by the buyer, either electronically or hard copy.
03. application for credit. Agreement between the buyer (applicant) and the issuing bank which spells out their
mutual obligations, including that of the applicant to reimburse the issuing bank when payments are
made to the beneficiary in accordance with the terms of a letter of credit. For assistance in filling out an
application for a letter of credit, refer to page 42 of this Guide.
04. letter of credit. Agreement between the issuing bank and the seller (beneficiary) that specifies conditions
that must be met before payments will be made.
What is the difference between an advised and a confirmed letter of credit?
The letter of credit transaction usually involves two banks, the buyer’s bank issuing the letter of credit and a bank
in the seller’s country that advises the letter of credit to the beneficiary. The advising bank may also assume the
role of confirming bank. Whether advising and/or confirming, the seller’s bank assumes certain responsibilities.
advising: An advising bank acts as the agent of the issuing bank. The function of the advising bank is to take
reasonable care to verify the authenticity of letters of credit it receives and then accurately transmit the letters
of credit to their beneficiaries. When advising a letter of credit, the bank assumes no liability. On receipt of the
documents for examination and payment, the advising bank will pay the seller only if it received good funds and has
received reimbursement from the issuing bank, even if it was specifically nominated as the paying bank in the letter
of credit.
Confirmation: By confirming a letter of credit, the advising bank or another bank assumes the same responsibilities
as the issuing bank, including the obligation to pay against presented documents (if they are in order and all of the
letter of credit terms are met). In effect, the beneficiary has the individual promise of two banks—the issuing bank
and the confirming bank—to pay against conforming documents. Confirmation of a letter of credit is an extension
of credit and requires credit approval of the issuing bank by the confirming bank. When a bank confirms a letter of
credit, it takes the credit risk of the issuing bank and must have in place a credit limit for that issuing bank.
How is a letter of credit confirmed?
When negotiating the terms of sale, the seller may require a letter of credit that requests the advising bank to add
its confirmation. The buyer includes this request when submitting the application for letter of credit issuance to
his or her bank. In most instances, the issued credit states: “Please advise beneficiary adding your confirmation”
or words to similar effect. Note, this is a request, not a requirement. The advising bank for various reasons may
decline to add its confirmation and simply advise the letter of credit without confirmation.
What documents are usually required under a letter of credit?
The documents for an international sale can vary significantly from transaction to transaction depending on the
destination and the product being imported. See Chapter 5 for a detailed discussion of letter of credit documents.
Bank of america merrill lynch SolutionS for importerS
Chapter 03
Import Letters of Credit Defined
Parties and Roles in Commercial Letter of Credit Transactions
What are the parties and roles in an import letter of credit?
01. account party/applicant—The buyer of goods or services who requests the letter of credit to be opened under
its liability by the issuing bank.
02. Beneficiary—The seller of goods or services to whom the letter of credit is addressed and who is entitled to its
benefits.
03. issuing Bank—The primary financial institution that initiates and writes the letter of credit extending its
guarantee and liability to pay if the terms and conditions are fulfilled.
04. advising Bank—The bank, usually in the beneficiary’s country, whose primary job is to pass on the letter of
credit to the beneficiary. The advising bank is normally a correspondent bank of the issuing bank. That
means that the two parties have exchanged authentication procedures and may have also established
accounts with each other. An important part of passing on a letter of credit to a beneficiary is verifying
the authenticity of the letter of credit to it. When the advising bank authenticates the credit, it is saying
that the letter of credit is a genuine instrument from the named issuing bank. It is not commenting on
the creditworthiness of the bank or its country. This procedure gives the seller some protection against
fraudulent instruments. That is why it is common practice to have letters of credit advised to a seller
through a correspondent bank. Letters of credit may be received by the advising bank by mail, telex, cable
or S.W.I.F.T. (S.W.I.F.T. is the acronym for Society for Worldwide Interbank Financial Telecommunication, a
telecommunication network of member banks.)
05. Drawee Bank or paying Bank—This is the bank named in the credit as duly authorized to make payment.
Drafts are drawn and/or documents presented to this bank as a general rule. However, special instructions
might modify this procedure. In the U.S., this is generally the issuing bank, i.e., the buyer’s bank.
06. examining Bank—Both the issuing bank and the seller’s bank must examine all documents stipulated in the
credit with reasonable care to ascertain whether or not they appear, on their face, to be in compliance with
the terms and conditions of the credit.
07. Confirming Bank—A confirming bank is a financial institution requested by the issuing bank to add its
guarantee of payment or acceptance to the credit instrument. It is necessary for this bank to establish a
credit line or facility for the issuing bank in order to agree with this request. The bank requested to add its
confirmation is usually but not necessarily the advising or drawee bank. A seller should request the buyer to
authorize the issuing bank to request confirmation. Import letters of credit issued by Bank of America do not
normally request confirmation from another bank, due to their “AAA” credit rating.
08. reimbursing Bank—At times, the issuing bank names a bank where the issuing bank keeps funds in the
currency of the letter of credit to pay on its behalf, drawee or negotiating banks to whom payment is due.
This bank, named in the letter of credit, known as a reimbursing bank, is usually named under the special
instructions portion of the letter of credit. See I.C.C. Publication No. 600, Article 13.
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Chapter 03
Import Letters of Credit Defined
09. negotiating Bank—Negotiation is the process whereby a bank examines the documents and actually pays
funds to the beneficiary. This is not very common because most banks are not willing to advance funds prior
to receipt of the goods. The beneficiary is paid immediately upon examination of documents conforming to
the LC or after approval by the issuing bank is determined by the payment terms stipulated in the letter of
credit. The negotiating bank is either nominated by the beneficiary under a freely negotiable letter of credit
or designated as a restricted negotiating bank by the issuing bank. The concept of a negotiating bank allows
more flexibility into the payment mechanism and enables beneficiaries to present documents for payment to
their local bank.
Mitigating the Risk of Fraud in the Trade Arena
At Bank of America we constantly strive to protect our clients from the risk of fraudulent trade finance
transactions. In our Trade Operations units around the globe, many evaluation processes take place each day in an
attempt to recognize and prevent fraud. Here are some of the precautions we take:
• We transmit and receive secure and authenticated letters of credit, collections and related messages via
S.W.I.F.T. (Society for Worldwide Interbank Financial Telecommunication; see page 57 of this guide for an
example).
• While the UCP 600 tells us that “Banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any documents(s) . . .” (Uniform Customs and Practice for
Documentary Credits, 2007 Revision, International Chamber of Commerce), the close and careful examination
of documents ensures that they are reflective of the requirements in the letter of credit and thus serves to
reduce the likelihood of payment against fraudulent documents.
• All of our associates that handle trade transactions are required to participate in Anti-Money Laundering
training, enabling them to understand the red flags in a transaction that may point to fraud as it relates to
money laundering. This training includes “Know Your Customer” evaluation metrics, and stresses reporting of
any suspicious transaction.
• All of our associates that handle trade transactions attend Compliance Training courses, further refining their
skills in recognizing and properly reporting of suspicious transactions.
• Our associates stay current on fraud issues in our business through trade publications, conferences, internal
broadcasts and participation in professional trade organizations.
• Our Web-based trade activity management system, Bank of America Direct® Trade Services , can also help
reduce the incidence of trade fraud by providing complete security and one point of entry into the Bank of
America back office.
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Anti-Money Laundering Policies and OFAC Compliance at
Bank of America
Anti-Money Laundering (AML)
Crime has a destructive and devastating effect on the communities in which we operate. Safeguarding the global
financial system is critically important for the economic and national security of the jurisdictions in which Bank of
America operates. Accordingly, it is the policy of Bank of America to take all reasonable and appropriate steps to
prevent persons engaged in money laundering, fraud, or other financial crime, including the financing of terrorists
or terrorist operations (hereinafter collectively referred to as “money laundering”) from utilizing Bank of America
products and services.
With a view to ensuring that the financial system is not employed as a channel for criminal funds, associates
at Bank of America make reasonable efforts to determine the true identity of all parties involved in Bank of
America transactions. Bank of America conducts its trade business in conformity with high ethical standards in
the countries in which it does business and strictly adheres to all laws and regulations pertaining to financial
institutions. While it is accepted that Bank of America may not always be able to determine whether a transaction
originates from, or is a part of, a criminal activity, Bank of America follows these general principles:
01. Bank of America takes reasonable steps to determine the true identity of all customers and beneficial users
of Bank of America products and services.
02. Bank of America will not knowingly accept funds from, make loans to, or do any type of business with
customers whose money the bank believes is derived from criminal activity.
03. Bank of America will not ignore indications that a customer’s money originated from criminal or other
money laundering activities. When Bank of America becomes aware of facts which lead to a reasonable
suspicion that funds held by it are from criminal or other money laundering activity or that transactions
entered into are themselves criminal in purpose, appropriate measures, consistent with the law, will be
taken. These include denial of assistance to the client, severing relations with the client, closing or freezing
accounts, and when appropriate, filing of a suspicious activity report.
04. Bank of America will avoid providing support or assistance to clients seeking to deceive law enforcement
agencies through the provision of false, altered, incomplete or missing information.
05. Bank of America will cooperate fully with law enforcement and regulatory agencies to the extent that it can
do so under all applicable foreign and domestic laws.
06. Bank of America will report all identified instances of suspicious activity to the extent that it can do so under
all applicable foreign and domestic laws.
Anti-Boycott Policy
Bank of America Corporation, its domestic affiliates and its offshore branches, offices, subsidiaries and controlled
affiliates are “U.S. persons.” They transact business with residents and nationals of boycotting and boycotted
countries as well as with other persons and corporations that do business with such countries and their nationals.
Therefore, Bank of America often receives requests to comply with unsanctioned foreign boycotts.
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Such requests most frequently occur in letter of credit transactions. Bank of America handles several thousand
letters of credit and collections each year, which involve persons and commerce of boycotting and boycotted
countries.
Bank of America is committed to full compliance with all laws applicable to its business, including anti-boycott laws
of the United States. Accordingly, bank units must not enter into any agreement or implement any letter of credit
containing an impermissible boycott condition or take any other action prohibited by the United States. Additionally,
bank units must not implement any letter of credit or process any other document if it uses the term “blacklist” or
“boycott” or if its implementation or processing would constitute boycott participation under United States tax laws.
Bank of America general anti-discrimination policy prohibits all bank units from discriminating against any person
based on race, religion, sex or national origin. Bank units must not engage in any transaction containing such a
condition. Bank of America does not engage in any discriminatory business practices in connection with the Arab
League’s boycott of Israel.
Office of Foreign Assets Control (OFAC) Compliance
OFAC administers and enforces economic and trade sanctions based onUS foreign policy and national security
goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in
activities related to proliferation of weapons of mass destruction. OFAC acts under Presidential wartime and
national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions
and freeze foreign assets under U.S. jurisdiction. Many of the sanctions are based on United Nations and other
international mandates, are multilateral in scope, and involve close cooperation with allied countries. OFAC has
promulgated regulations to help administer its program. AllU.S. persons and entities, including banks, federal
branches and agencies, international banking facilities, and overseas branches, offices and subsidiaries of U.S.
banks must comply with the laws and OFAC-issued regulations. In general, these regulations:
• Require blocking of accounts and other assets of specified countries, entities, and persons.
• Prohibit unlicensed trade and financial transactions with specified countries, entities, and persons.
Bank of America maintains an effective OFAC compliance program, including written policies and procedures for
checking transactions for possible OFAC violations, designating associates responsible for day-to-day compliance,
establishing and maintaining strong lines of communication between departments of the bank, associate training,
and an annual in-depth audit of OFAC compliance. Letters of credit, wire transfers, and non-client transactions such
as funds transfers are compared with OFAC lists before being conducted.
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20 Most Important Characteristics of an Import Letter of Credit
01. irrevocable—This term means that the issuing bank cannot cancel or amend an LC without the consent of the
beneficiary.
02. expiry Date and issue Date—As agreed upon between the buyer and the seller. Commercial import letters of
credit generally expire in the country of the beneficiary.
03. issuing Bank / advising Bank—Needs to be listed.
04. importer/exporter—Make sure that the full name of your seller and the seller’s address, as well as the full
name and address of your own company, are correctly stated on the letter of credit application and the letter
of credit itself.
05. Value/currency—The amount of your letter of credit should conform to the amount of your sales contract.
Make sure that the currency of the amount is accurately indicated on your letter of credit application.
06. Description of Goods/Services—We recommend that you employ a very simple merchandise description
when applying for a letter of credit. Excessive details may cause discrepancies and delays; if the nature of
your sale requires a detailed description of merchandise, it belongs in the sales contract or purchase order
agreement between you and your seller. The sales contract number or purchase order agreement can then be
quoted in the merchandise description of the letter of credit.
07. required Documents—See Chapter 5, “A Closer Look at Letter of Credit Documents.”
08. payment terms—Also known as “Tenor.” Make sure that payment terms are accurately indicated on your
letter of credit application, and correctly quoted in the letter of credit. The payment term “At Sight” indicates
that the bank will pay “within a reasonable time” after documents have been presented by the beneficiary
and found to be in order. If a letter of credit indicates “90-Days Sight,” with discount charges for beneficiary’s
account, you agree to 90-day terms, and you will be debited 90 days after the presentation of the draft and
complying documents. If the discount charges are for the buyer’s account, payment to the beneficiary will be
effected “At Sight” and the buyer will pay discount charges at the point of negotiation and the face value of
the draft at maturity. See Chapter 7 for a complete discussion of usance terms.
09. incoterms—Shipment terms. See IncoTerms, Chapter 9.
10. port to port (Dispatch to Destination)—Make sure that your letter of credit application correctly states the port
of shipment and the port of destination, as indicated in your sales contract.
11. uniform customs and practices, publication no. 600—Your letter of credit should state that it is subject to the
Uniform Customs and Practice for Documentary Credits Publication No. 600 of the International Chamber of
Commerce.
12. Who pays fees?—Unless otherwise stipulated in the letter of credit, all banking charges are for the account of
the applicant. If charges are for the beneficiary’s account, as specified on the letter credit, they are normally
deducted from the face amount of the draft at the time of payment.
13. latest Shipment Date—The latest shipment date should be the same as that agreed to in your sales
agreement. If you do not stipulate a latest shipment date in your letter of credit application, it is understood
as the same date as the expiry date.
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14. presentation Date or Stipulation—The presentation date is usually a stipulation such as “Documents must
be presented for negotiation within 15 days after the on board date of the ocean bill of lading, and within
the validity of the letter of credit.” A 21-day presentation stipulation is understood, in the absence of any
statement to this effect (see Article 14(c), UCP 600).
15. partial Shipments allowed/not allowed—If your letter of credit application does not indicate that partial
shipments are prohibited, it is understood that partial shipment is allowed. Make sure that this information
agrees with your original sales contract with the seller.
16. transshipment allowed/not allowed—If your letter of credit application does not indicate that transshipments
are prohibited, it is understood that transshipment is allowed. Make sure that this information agrees
with your original sales contract with the seller. Transshipment means that the merchandise is loaded on
a carrier that only goes to a certain point, and at that point the merchandise is unloaded and reloaded onto
another carrier.
17. reimbursement instructions—Determines when payment will be received by the exporter. Four major types of
reimbursement instructions are: a) issuing bank authorizes advising bank to debit their account; b) issuing
bank instructs advising bank to claim reimbursement from a third bank (reimbursing bank); c) issuing bank
requires advising bank to send them a cable notifying them that documents have been received and found to
be in compliance with letter of credit terms, after which issuing bank remits funds to advising bank; and d)
issuing bank requires advising bank to send documents to them for payment (slowest method of payment).
18. availability—Your letter of credit is either freely negotiable or straight. A freely negotiable LC will indicate
that it is “available with any bank by sight payment, by deferred payment, by acceptance or by negotiation.”
A negotiating bank may play various roles pursuant to the latitude extended by the letter of credit, but it
normally is allowed to take the documents in charge and pay the beneficiary against funds received from
the issuing bank. A straight, or restricted, LC will indicate that it is “available with (named bank) by sight
payment, by deferred payment, by acceptance or by negotiation.” The beneficiary must present documents at
the counters of the named bank.
19. confirming Bank—For all intents and purposes, beneficiaries normally present their documents to the
confirming bank and regard it as the primary source of payment. A confirming bank is obligated to pay
against compliant documents, regardless of whether or not funds are received from any reimbursement
source.
20. reimbursing Bank—The reimbursing bank is usually named under the Special Instructions portion of a letter
of credit, or in field :78: of a S.W.I.F.T. 700 message.
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Understand and Control Your Import Letters of Credit
What can an importer do to make sure that the letter of credit process works for him?
As an importer, you should strive to exercise control over this process. That’s why it’s so important to understand
the process and to establish a written contract or sales agreement with your seller before you apply to your bank
(the issuing bank) for a letter of credit. Your contract, sales agreement or purchase order should contain all the
conditions that are necessary to be included in the letter of credit.
When your bank issues a new letter of credit on your behalf, it will normally provide you with a copy of the letter of
credit. Always read the letter of credit thoroughly. If any parts of your letter of credit are not clear to you or do not
seem to agree with your letter of credit application and/or sales contract and/or purchase order, contact your local
Bank of America Global Trade Operations representative.
Also make sure that you understand any additional wording that Bank of America has added to the letter of credit
as we issue it.We are giving additional instructions directly to the advising bank in most cases, but you should
understand the meaning of these instructions.
Normally your seller should not ship merchandise until your letter of credit has been issued by your bank. You
may, however, ask your bank to issue a preliminary advice of the letter of credit to your beneficiary. This process
will provide you and your seller with a letter of credit number for tracking purposes, and will give your seller the
reassurance needed before shipping merchandise.
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Opening a Commercial Letter of Credit
Your bank looks at an import letter of credit line in much the same manner as any loan request. Careful evaluation
is made of your ability to reimburse Bank of America when drafts drawn under the letter of credit are presented or
when time drafts (acceptances) mature. Furthermore, a review of the importer’s overall credit strength is required
when it is anticipated that loans will have to be made to finance the payment of the draft. As with any type of
commercial loan, the bank obtains appropriate borrowing authorization, resolutions, guarantees, etc. from the
client.
To get started, discuss your trade finance business with your Bank of America Global Trade & Supply Chain
Solutions representative and determine the product that best suits your credit needs. Our bankers also understand
that your financial needs change as your business grows—from basic to fully integrated services. Tell us about your
changing needs and let us help you prepare for your financial future.
You will then complete an application and submit it to your banker. The application should be typed or neatly
printed, signed and accompanied by any required documents. Please note that we reserve the right to change the
Application and Agreement for Commercial Letter of Credit form when we deem appropriate.
Bank fees related to issuing and negotiation of import letters of credit are related to the cost, risk and time involved.
As with all major banks, charges are also levied for incidental activities that arise under import letters of credit.
Letters of credit are irrevocable and cannot be canceled prior to the expiration date without the written consent of
the beneficiary. After issuance, cancellation or other changes may only be effected by an amendment submitted to
Bank of America and with the agreement of the beneficiary.
A copy a Bank of America Commercial Letter of Credit Application is provided here, along with an explanation of
each of the fields on the application.
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Understanding the Commercial Letter of Credit Application
Commercial Letter of Credit Application
01. applicant—Enter your legal name exactly as it appears on your preapproved line of credit or application for
credit.
02. full text teletransmission /courier—Bank of America will send the issued letter of credit to an advising bank
in the country of the beneficiary using the method that you choose. When “full text teletransmission” is
chosen, Bank of America normally sends the letter of credit via S.W.I.F.T. to the advising bank for forwarding
to the beneficiary. Letters of credit can also be sent by a brief teletransmission advice, followed by full details
by airmail or courier. This same advising bank must be used when making an amendment to the letter of
credit.
03. advising Bank—Enter the name of the bank the beneficiary wishes to use to advise the letter of credit. If no
specific bank has been requested, leave this blank. Bank of America will send the letter of credit to a branch
of Bank of America or a correspondent bank in the beneficiary’s country to deliver the letter of credit to the
beneficiary. The only responsibility of the advising bank is to take reasonable care to check the apparent
authenticity of the letter of credit that it advises, thoroughly test key arrangements, and then mail or deliver
it to the beneficiary. In addition, advising banks might be nominated or requested to negotiate credits but
have no obligation to do so.
04. for account of—Use this box if you want the letter of credit to be issued on behalf of an entity other than the
applicant. Otherwise, leave blank.
05. in favor of—Enter the name and address of the beneficiary. The beneficiary is the party from which you are
buying the merchandise. This is the party entitled to be drawn under the letter of credit and the party that
will receive payment upon presentation of documents that comply with the terms of the letter of credit.
06. expiration Date—Enter the date the letter of credit is to expire. Be sure to allow plenty of time for the
beneficiary to make the shipment and present the documents required by the letter of credit. The expiration
date cannot be later than the date your available credit expires. Letters of credit typically expire at the
offices of an advising or negotiating bank in the beneficiary’s country. To allow time for any drawing to
reach us, collateral is generally held for 30 days after the expiration date. If the letter of credit expires at our
counters, the collateral is generally held for ten working days. This allows for documents that may still be in
transit to reach us.
07. amount—Enter the amount of the letter of credit in figures followed by the amount in words. Enter the name
of the currency. If blank, the currency will be assumed as U.S. dollars. However, your beneficiary may require
the letter of credit to be paid in a major foreign currency such as the Euro, Japanese Yen or British Pounds
Sterling. If the letter of credit is issued in a foreign currency, you undertake the exchange rate fluctuation
risk, and additional credit approval will be required.
08. covering—Letters of credit are usually issued for 100% of the amount of the invoice. They can be issued
for less than the full amount of the invoice if, for example, you have made an advance payment to the
beneficiary.
09. available By Drafts at (tenor)—The draft is the document that represents the demand for payment that the
beneficiary makes on the bank. Most letters of credit call for drafts at “Sight,” where the beneficiary is paid
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at the time documents are received and found to be in compliance with the terms of the letter of credit. If, on
the other hand, the beneficiary and bank have agreed to give you payment terms, the letter of credit will call
for drafts payable at some future time. For example, drafts payable at “90-Days Sight” or payable at “45 days
after Bill of Lading date.”
10. partial shipment—Check the appropriate box to indicate whether or not you will allow payment on partial
shipments.
11. transshipment—Check the box to indicate whether or not you will allow transshipment. Transshipment
means that the merchandise is loaded on a carrier that only goes to a certain point and at that point the
merchandise is unloaded and reloaded on another carrier. Transshipment should always be permitted on
air shipments and combined transport method shipments. It may be prohibited on shipments where direct
shipping service between the supplier and you is always available.
12. transferable letter of credit—Check the box to indicate whether or not you will allow this letter of credit to
be transferred by the beneficiary. A transferable letter of credit allows the beneficiary of a letter of credit to
make available (transfer) all or part of the proceeds of the letter of credit to a separate party. The parties to
whom the letter of credit is transferred acquire the same rights and responsibilities under the letter of credit
as the original beneficiary. Transferable letters of credit are typically used when both parties require the
protection of the letter of credit and the first beneficiary of the letter of credit is an agent or intermediary
procuring goods from another supplier whose identity he does not want to disclose to the buyer.
13. Shipment from—To: For shipments where a multi modal document is called for, complete at least fields
A and/or D, fields B and C are optional and should be used as applicable to give clear information about
the expected movement of the goods. For shipments where an ocean or charter party bill of lading OR an
air waybill is called for, complete fields B and C only. For shipments where road, rail or inland waterway
documents are called for, complete fields A and D only.
14. merchandise to Be Described in invoice as—Enter a brief description of the merchandise. If your description
is too detailed, we may ask you to shorten the description before we issue the letter of credit. A detailed
description of the merchandise belongs in the contract between buyer and seller or in purchase order, not in
the letter of credit.
15. Shipping terms/price Basis—Also known as Incoterms, the shipping terms you select should be discussed
and agreed to with your supplier in advance of completing the application. The price basis determines
which services and related costs, usually freight and insurance, are included in the price, in addition to the
cost of the goods themselves. International trade terms used in connection with specific prices should be
understood thoroughly by both the buyer and seller (see Incoterms).
16. Documents required—This area contains a number of commonly requested letter of credit documents to
demonstrate shipment of the merchandise you’ve contracted to buy. The documents you will need from the
beneficiary depend upon the contract between you and the beneficiary, the country from which the goods will
be shipped, the price basis and, in some cases, the merchandise itself. Your Customs House Broker can give
you guidance regarding the documentation you will need from the beneficiary. Refer to Chapter 5 for more
information on documents typically required under a letter of credit.
commercial invoice: This is always required. Specify how many originals and how many copies you’ll need.
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packing list: Typically required, it describes the contents that were packed into the containers you’ll be
receiving. Specify how many originals and how many copies you’ll need.
Certificate of Origin: Typically required, it certifies where your merchandise originated. Specify how many
originals and how many copies you’ll need.
negotiable marine/air insurance policy: Check this box if your shipping term includes insurance. Stipulate who
is to effect the insurance coverage. Also check the boxes to indicate which risks should be covered by the
insurance policy.
transport Documents: Indicate type of transport document and number of originals required based on the
expected mode of shipment.
consigned to/the order of: Indicate to whom the merchandise will be consigned, the order of and how the
consignment must be endorsed. This is the party that will be able to take possession of the goods.
marked notify: Specify a party to be notified when the goods arrive for dispatch to the consignee. Marked
Freight: Check the box to indicate whether freight is to be covered on a “collect” or “prepaid” basis.
other Documents: List any additional documents you expect the exporter to produce. These could include
Inspection Certificates and Phytosanitary Certificates, among others. If the shipment is to be made by air,
you may wish to require a signed statement from the beneficiary that one set of documents has accompanied
the shipment. This will enable you to pick up the merchandise as soon as it arrives. This should be included
in Special Instructions.
17. Special instructions to be included in the letter of credit: When there are additional terms or conditions that are
not covered by these documents, you can indicate them here. Bank of America automatically indicates that
any banking charges other than ours are to be charged to the beneficiary, unless you indicate otherwise. We
may inquire about the purpose of special instructions requested by you, to ensure that they can be complied
with.
18. Special instructions for Bank of america: Use this area to tell us who we should call with any questions about
your application and who to contact if there are discrepancies in the documents presented.
19. Documents must be presented to the negotiating or payment bank no later than: This is the amount of time the
seller has to obtain, complete and present all documents required under the letter of credit for payment.
If this space is left blank, the shipper may take up to 21 days to present documents, not to exceed the
expiry date of the letter of credit. Steamship companies normally require an original bill of lading to
release merchandise. If you allow the shipper too many days to present documents, the ship may arrive at
the destination port in advance of the documents. The merchandise will then be placed in storage by the
steamship company and will accrue demurrage charges. The number of days entered here added to the
latest shipment date in box No. 12 should arrive at the expiration date in box No. 5.
Agreement
Following the demonstration copy of the Commercial Letter of Credit Application, you’ll find an example of
the Agreement from the reverse side of the application. This represents the Agreement between you and
Bank of America for the issuance of your letter of credit. Please read it carefully, and complete and sign in
accordance with the instructions on the Agreement itself.
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A Discussion of UCP 600
All commercial letters of credit should be issued subject to a set of rules established by the International Chamber
of Commerce, and known officially as “The Uniform Customs and Practice for Documentary Credits.” The
current version is referred to as UCP 600 and went into effect July 1, 2007. The following discussion is intended
to summarize and clarify the 39 articles that comprise UCP 600. Partial quotes and comments are given in this
chapter and should not be interpreted as a full summary. For a complete reading of UCP 600, as well as the URC
522 (“Uniform Rules for Collections”), please refer to the ICC publications, available for purchase on ICC’s Website
at www.iccbooksusa.com.
Art. 1 application of ucp
This article states that all letters of credit, including standbys, are issued subject toUCP 600, provided
that the LC specifically indicates this to be the case. Great care should be taken to avoid accepting credits
that are not issued subject to UCP 600. Please note that standby LCs can also be issued subject to another
set of rules issued by the International Chamber of Commerce, the ISP 98.
Art. 2 Definitions
This article gives 14 definitions relative to this publication.
Art. 3 interpretations
This article gives 12 interpretations to use within the framework of the rules.
Art. 4 credits vs. contracts
“A credit by its nature is a separate transaction from the sales or other contract on which it may be
based.”
•
This article makes a distinct difference between the credit itself and any underlying contract to which
the transaction is connected. Banks are not concerned with any underlying contracts, and an applicant
cannot prevent a bank from paying on a credit simply because the applicant asserts that the underlying
contract has been broken or not fulfilled.
•
There may be various contractual relationships which exist between banks or between the applicant
and the issuing bank. Beneficiaries may not avail themselves of such relationships (see Art. 5).
Art. 5 Documents vs. Goods/Services/performance
This article clarifies that banks deal only with documents, and not with goods, services or other
performances relative to those documents.
For example: A credit calls for shipment of “5 blade ceiling fans,” and the applicant (buyer) learns that
the beneficiary shipped “4 blade ceiling fans.” The applicant cannot instruct the bank to deny payment.
So long as the documents being submitted describe the goods as “5 blade ceiling fans,” the bank is
obligated to pay (assuming all other terms and conditions were complied with). Likewise, if a standby
credit contains a clause that requires the beneficiary to submit a statement certifying that “The applicant
is in default under their contract No. 1234 dated May 15, 2006,” then the applicant is precluded from
instructing the bank to deny payment simply on the basis that the applicant claims not to be in default.
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Art. 6
availability, expiry Date and place for presentation
“A credit must state the bank with which it is available or whether it is available with any bank.” This
article gives specific guidance on the various availability structures, expiry conditions and place for
presentation of documents. Properly structured, a credit will effectively tie these items to one another.
Art. 7
Bank undertaking
A credit is an obligation of the issuing bank to honor, provided that a complying presentation is made.
The article outlines the various scenarios which will engage the issuing bank’s obligation depending on
the availability of the credit.
Art. 8
Confirming Bank Undertaking
By adding its confirmation to a credit, a bank is obligated to honor provided that a complying
presentation is made. The article outlines the various scenarios which will engage the confirming bank’s
obligation depending on the availability of the credit.
Art. 9
advising
A credit may be advised to a beneficiary through another bank without engagement on the part of that
bank. This bank may act in the role of either an advising bank or as a confirming bank. The advising
bank’s responsibility is limited to taking reasonable care to ensure the authenticity of the credit and the
accuracy of the credit as it is passed to the beneficiary. If it is unable to verify authenticity, it must notify
the issuing bank right away. Should the advising bank choose to advise an unauthenticated credit, they
must so indicate this on their cover letter to the beneficiary. This responsibility on the part of an advising
bank is very important. Unfortunately, there have been numerous documented cases of bogus letters of
credit being issued, and then advised or confirmed by yet another bogus bank in the beneficiary’s country.
This is just one good reason to arrange for letters of credit to be advised/confirmed by the beneficiary’s
bank whenever possible.
Art. 10
amendments
A credit cannot be amended or cancelled without the agreement of the issuing bank, the confirming bank
(if any), and the beneficiary. The only minor exception is covered under transferable credits, Article . An
issuing bank is bound by any amendments as soon as it has issued them. A confirming bank is likewise
bound from the moment that it extends its confirmation to any amendment. However, a confirming bank
may decline to extend its confirmation to an amendment, and, if it does so, it must inform the issuing
bank and the beneficiary without delay. An amendment does not become effective until the beneficiary
accepts the amendment. Acceptance may be in writing. If the beneficiary does not accept the amendment
in writing but subsequently presents documents that conform to the credit and the not yet accepted
amendment, then the amendment is deemed accepted at that time. If the beneficiary wishes to reject the
amendment, rejection should be done in writing prior to presenting documents. If there is more than one
change covered in the same amendment advice, the beneficiary must accept or reject all changes in that
particular amendment.
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Art. 11
teletransmitted and pre-advised credits
Credits sent by an issuing bank to an advising bank via a teletransmission are considered the operative
instrument and no confirmation is expected to follow.
Art. 12
nomination
“An authorization to honor or negotiate does not impose any obligation on that nominated bank.” This
article describes the options of a bank who has been nominated to honor or negotiate. It is also the article
that authorizes a nominated bank that has accepted a draft or incurred a deferred payment undertaking
to prepay or purchase that undertaking from the beneficiary. Lastly, this article makes it clear that the
act of receiving, examining and forwarding documents does not constitute honor or negotiation.
Art. 13
Bank-to-Bank reimbursement arrangements
This article only applies to those credits which arrange for bank-to-bank reimbursement where the letter
of credit does NOT indicate that the reimbursement is subject to URR 525 (ICC Rules for Bank-to-Bank
Reimbursements).
•
When an issuing bank opens a letter of credit that is available with a bank other than itself, the issuing
bank will frequently indicate the name of a reimbursing bank. The issuing bank maintains an account
with the reimbursing bank and authorizes them to honor reimbursement claim(s) from the nominated
bank that has acted in accordance with its nomination under the credit. This article simply states that
the issuing bank must provide authorization instructions to the reimbursing bank in a timely manner.
The bank that requests reimbursement is called the claiming bank.
•
A claiming bank shall not be required to supply a certificate of compliance with the terms and
conditions to the reimbursing bank.
•
If the reimbursing bank fails to pay the claiming bank, then the issuing bank is still obligated to pay
the claiming bank provided that all terms and conditions of the credit have been complied with.
•
The issuing bank shall be responsible to the claiming bank for any loss of interest if reimbursement
is not provided by the reimbursing bank on first demand, or as otherwise specified in the credit or
mutually agreed, as the case may be.
•
The reimbursing bank’s charges are to be paid by the issuing bank unless specified for the account
of the beneficiary. If so specified, the reimbursing bank’s charges will be deducted from the payment
to the claiming bank. In the event that the credit is not drawn under the reimbursing bank, charges
remain for the account of the issuing bank.
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Import Letters of Credit Defined
Art. 14
Standard for examination of Documents
This article gives exporters a clear idea of how banks will perform the examination of their documents
and sets a strong foundation for how to prepare complying documents. It deals with the following topics:
•
Banks must determine compliance on the basis of documents.
•
Each bank that has a specific duty in the LC (issuing bank, confirming bank, nominated bank that
is acting on its nomination) has a maximum of five banking days following the day of presentation to
examine the documents and determine compliance.
•
A presentation must be made no later than 21 days after the goods have been shipped, but in no case
later than the expiry date of the credit.
•
example: An LC is issued with an expiry date of Saturday, August 25, 2007, but does not stipulate a
latest shipping date. Documents could be presented as late as Monday, August 27, 2007; however, the
latest shipping date could be no later than Saturday, August 25, 2007.
Note: Sometimes documents are presented on or before the expiry date or latest day for presentation,
and are subsequently found to contain discrepancies. On occasion, the beneficiary must re-present
corrected documents. If the corrected documents are submitted after the expiry date or latest day for
presentation then a new discrepancy will exist of “LC expired” or “late presentation.” For this reason it
is highly advisable to present documents at least seven days prior to the expiry date of the credit.
•
The data content in any required document in the presentation must not conflict with data
•
The description of goods in documents other than the commercial invoice may be in general terms.
•
Except for the transport document, commercial invoice and insurance document (if any), unless the
credit stipulates otherwise, banks will accept documents as presented if the content appears to fulfill
the function of the required document.
•
Documents presented that are not required by the credit will be disregarded and likely will be returned
to the presenter.
•
If a credit speaks to a condition and does not indicate which document would contain information to
show compliance, that condition will be disregarded.
•
Information such as beneficiary and applicant addresses and contact details and the named shipper or
consignor on any document may vary from that shown in the credit.
Art. 15
complying presentation
This article describes the actions around negotiation, honor and forwarding of documents required of a
bank when a presentation is found to be in compliance.
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Import Letters of Credit Defined
Art. 16
Discrepant Documents, Waiver and notice
This article describes the actions permitted or required of a bank when a presentation does not comply.
•
The bank may refuse to negotiate or honor.
•
The issuing bank may approach the applicant for waiver of discrepancies.
•
The bank deciding to refuse must give a single notice to the presenter, by expeditious means, by the
close of the 5th banking day after presentation that includes:
A statement of refusal
A listing of each discrepancy
A notice of how the documents will be handled
•
If the bank fails in any of these responsibilities they shall be precluded from claiming that the
documents do not comply.
Art. 17
original Document and copies
This article explains the issues around original vs. copy documents:
•
At least one(1) original of each document called for in a credit must be presented.
•
Guidelines are described regarding how to determine if a document is an original for the purposes of
these rules.
Art. 18
commercial invoice
This article describes the basic features of a compliant commercial invoice. It is important to note that
the requirement for merchandise description has a higher threshold for compliance than that for other
documents—“must correspond with that appearing in the credit.”
Art. 19
transport Document covering at least two Different modes of transport
This article describes the required characteristics for the transport document we often call the
multimodal or combined transport document. Here you will find information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
•
Terms of carriage
•
Transshipment information
Art. 20
Bill of lading
This article describes the basic required characteristics for the transport document often referred to
as a Marine or Ocean Bill of Lading (B/L) and that indicates a port-to-port shipment. Here you will find
information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
•
Terms of carriage
•
Transshipment information
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Import Letters of Credit Defined
Art. 21
non-negotiable Sea Waybill
This article describes the basic required characteristics of the document often referred to by its shorter
name—sea waybill. This document must not be confused with the non-negotiable copy of a bill of lading or
multimodal transport document nor with a bill of lading or multimodal transport document that has been
issued in straight or non-negotiable form. In the article you will find information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
•
Terms of carriage
•
Transshipment information
Art. 22
charter party Bill of lading
This article describes the basic required characteristics of this private agreement transport document—
the bill of lading that is subject to a charter party contract. In the article you will find information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
Art. 23
transport Document
This article describes the basic required characteristics of the document often referred to as an air
waybill (AWB). In the article you will find information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
•
Terms of carriage
•
Transshipment information
Art. 24
road, rail or inland Waterway transport Document
This article describes several transport documents where, for the purposes of letters of credit, the basic
required characteristics are similar. You might see the documents referred to as (including but not
limited to):
•
Truck/ Road - Bill of Lading or Waybill
•
Rail Bill of Lading or Waybill
•
Barge Waybill
In this article you will find information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
•
Transshipment information
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Import Letters of Credit Defined
Art. 25
Courier Receipt, Post Receipt or Certificate of Posting
This article describes the basic required characteristics for transport documents that indicate shipment
of goods by courier or postal services. In this article you will find information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
Art. 26
“on Deck,” “Shipper’s load and count,” “Said by Shipper to contain” and charges additional to freight
This article describes certain wording that typically is found on transport documents and details how
banks will deal with this circumstance.
Art. 27
clean transport Document
This article provides a rule that says that bank will accept only clean transport documents and what
constitutes a transport document that is not clean. The word “clean” need not appear on the document.
Art. 28
insurance Document and coverage
Insurance documents come into play when the shipment requires the seller to provide proof that the
goods have been insured as they move from seller to buyer. This article gives an overview of what
basic requirements must be met when an insurance document is required and conditions for certain
characteristics.
•
Insurance document types
•
Signature requirements
•
Dates of coverage
•
Logistics covered
•
Value of coverage
•
Risks covered
•
Exclusions and deductibles
Art. 29
extension of expiry; last Date or Day for presentation
Control of the critical dates in a credit is one of responsibilities of the beneficiary that will help ensure
they retain the protection of the credit. This article gives the beneficiary the right tomake their
presentation on the banking day following the latest day for presentation, whether that is tied to a
shipping date or is actually the expiry date of the credit.
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Chapter 03
Import Letters of Credit Defined
Art. 30
tolerance in credit amount, Quantity and unit prices
This article provides for tools within the credit that create allowances often necessary with regard to
the details of amount, quantity and unit prices, while also providing for protection of unit prices where
necessary. This is a very useful article in helping credits adapt to the needs of the buyer and seller when
exact values are undetermined until goods are actually shipped.
allowances in credit amount, Quantity and unit price
•
Sometimes an LC will refer to the amount or the quantity as “about,” or “approximately.” When this
happens, the amount or quantity may be up to 10%more or less than the amount or quantity (including
unit prices) stated in the credit.
•
Banks will accept documents which show that the quantity of goods being shipped has a variance of
5%more or less than that stipulated in the credit unless it would cause the amount of the drawing to
exceed the available balance under the credit, or the credit states the quantity in terms of a stipulated
number of packing units.
example: LC calls for 5,000 gallons of orange juice valued at $100,000.Unless specifically prohibited in the
credit, banks will accept documents showing the amount of product within a range of 4,750 gallons up to
5,250 gallons. Note: The amount being drawn could be reduced to $95,000 (for 4,750 gallons), but could not
exceed $100,000 even though between 5,000 and 5,250 gallons were shipped.
example: LC calls for 5,000 cartons of orange juice. Banks will reject documents which indicate a
shipment of either less than or more than 5,000 cartons. (Exception: Banks will accept documents for less
than 5,000 cartons if the credit allows for partial shipments). UNLESS a credit stipulates otherwise, or
unless Article 30 (a) or (b) applies, banks will accept documents with an amount up to 5% less than the
amount of the credit. However, if the credit calls for a specific quantity or unit price, then the full quantity
must be shipped and the unit price must not be reduced.
example: LC calls for a shipment of 5,000 cartons of orange juice totaling $100,000. Partial shipments
are prohibited. Banks will accept documents totaling between $95,000 and $100,000 provided that the
invoices still indicate that 5,000 cartons have been shipped.
Art. 31
partial Drawings or Shipments
While the standard credit makes no restrictions around partial shipments and/or partial drawings,
credits can and often do restrict partial shipments and/or drawings. This article helps all parties
concerned understand what constitutes a partial shipment in order to control partial shipment
restrictions.
Art. 32
installment Drawings or Shipments
Some credits contain conditions for required installment drawings and/or shipments. This article tells us
that if any such installments are not drawn or shipped according to the time requirements in the credit,
the credit CEASES to be available for that and any further drawings.
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Import Letters of Credit Defined
Art. 33
hours of presentation
Banks have no obligation to be available to take in presentations outside of normal business hours (see
Article 2 for definition of banking days).
Art. 34
Disclaimer on effectiveness of Documents
This article establishes that, while banks deal in documents only with regard to the transaction covered
by the LC, they do not have any responsibility to go outside of those documents to establish their
genuineness or accuracy or descriptions therein, etc.
Art. 35
Disclaimer on transmission and translation
This article establishes that banks are not responsible for consequences of loss in transit or mutilation of
documents arising out of transmission or delivery.
Art. 36
force majeure
This article relieves banks of responsibility for consequences arising during force majeure events.
Art. 37
Disclaimer for acts of an instructed party
This article covers a few separate issues related to the use of another bank’s services to complete the
work needed to process the letter of credit.
•
Banks often will utilize the services of another bank to effect instructions given by the applicant. This
is done so at the applicant’s risk.
•
Neither the issuing bank nor the advising bank assumes responsibility should instructions it transmits
to another bank not be fulfilled, even if the bank was at their choice.
•
A bank performing services at the request of an instructing bank is entitled to claim their charges
from the instructing bank; if the credit states that the charges are for account of the beneficiary and
these charges cannot be collected from them, the instructing bank remains liable for these charges.
Art. 38
transferable credits
A credit may be issued allowing for transfer by the issuing bank or by a bank nominated in the credit.
This article describes the governing rules for the transfer process.
•
A bank is not obligated to transfer even though the LC states it is transferable
•
Transferable credit is defined
•
Transferring bank is defined
•
Charges for transfer must be paid by the beneficiary
•
Transfer in whole or in part
•
How to handle amendments
•
More than one second beneficiary
•
Terms that may be changes as the transfer is made
•
Substitution of invoice and draft by the first beneficiary; failure to substitute when demanded
•
Second beneficiary presentation of documents must be made to the transferring bank
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Import Letters of Credit Defined
Art. 39 assignment of proceeds
The beneficiary may instruct that the proceeds (some or all) of a credit be paid to another party. Local law
governs such transactions.
This paraphrased version of the UCP 600 is intended to summarize and clarify its articles only, and is not to be
construed as the entire document. Partial quotes are made in this section. Bank of America assumes no liability
for any misunderstanding arising from the use of this condensed version. For a complete reading of UCP 600, URC
522, ISP98 and ISBP, please refer to the ICC publications available for purchase on ICC’s Web site at http://www.
iccbooksusa.com.
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Chapter 03
Import Letters of Credit Defined
A Discussion of the eUCP
(Reference to UCP 500 can be carried over to UCP 600)
As an importer, you are probably aware that digital developments are shrinking the world and creating new
opportunities for your success in the global marketplace. New technologies can help increase cash flow, strengthen
supply chain relationships and streamline your trade activity.
With a basic understanding of these new guidelines for electronic document presentment (eUCP), you can start to
consider how digital developments will affect the future of your organization.
The International Chamber of Commerce’s rules governing documentary credits now include an electronic
supplement that caters to the growing number of documents that are presented electronically. The eUCP came into
force on March 31, 2002 and was updated in July 2007 to bring it current with the UCP 600. It is now titled eUCP 1.1.
The eUCP, several pages in length, covers items such as the relationship of the eUCP to UCP 600, electronic formats
for electronic documents, amendments, place of presentation and notice of dishonor and preclusion.
These new articles supplement the UCP 600 rules and in no way replace them; they are to be used in conjunction
with the UCP 600. The eUCP provisions shall prevail to the extent that they would produce a result different from
the application of the UCP 600.
Parties wishing to use the eUCP will specifically have to incorporate it into the credit. However, a credit subject to
the eUCP is also subject to the UCP without express incorporation of the UCP.
The eUCP contains a number of definitions of terms that have totally different meanings in the electronic and paper
based contexts. Terms such as “appears on its face,” “place for presentation,” and “sign”— all common features of
the UCP—are redefined to take an electronic environment into account. The full-text publication of the eUCP can be
ordered from the International Chamber of Commerce at http://www.iccbooksusa.com.
At Bank of America we constantly evaluate new technology and consider future partnerships. Our e-Solutions are
scalable, interoperable and are designed with the client in mind. Because we are not locked in to a single solution
and a single vendor, we can provide sound recommendations to help you manage increased volumes and complexity
and expand your global trade opportunities.
General statements from the eUCP Working Group ICC Banking Commission—March 2002
“The Working Group concluded that its task is to create a supplement to the UCP that will deal with the issues of
electronic presentation. The official name for the work is ‘UCP Supplement for Electronic Presentation.’ It uses the
acronym ‘eUCP.’ The eUCP provides definitions to allow current UCP terminology to accommodate the presentation
of the equivalent of paper documents electronically and to provide necessary rules to allow the UCP and the eUCP
to work together. The eUCP has been written to allow for presentation completely electronically or to allow for a
mixture of paper documents and electronic presentation. While practice in this area is evolving, the Working
Group believes that providing exclusively for electronic presentation is not entirely realistic, nor will it promote the
transition to total electronic presentation.
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Import Letters of Credit Defined
The Working Group has not seen the need to address any issues relating to the issuance or advice of credits
electronically, since current market practice and theUCP have long allowed for credits to be issued and advised
electronically.
It is important for the reader of the eUCP to understand that many of the articles of the UCP are not affected by
the presentation of the electronic equivalent of paper documents and do not require any changes to accommodate
electronic presentation.
When read together, the UCP and the eUCP will provide the necessary rules to allow for electronic presentation and
are broad enough to allow for developing practice in this area. Where specific words or phrases used in the UCP
are defined in the eUCP, these definitions, unless otherwise stated, apply wherever the terms appear in the UCP.
The Working Group, in drafting the eUCP, has reviewed and considered definitions used in other ICC documents as
well as rules and regulations promulgated by governmental and international bodies. These definitions have been
used or partially used to the extent possible. Because the business is evolving, it is necessary in many cases to
modify these definitions or to create new definitions specifically to address the unique requirements related to the
presentation of the electronic equivalents of paper documents under the UCP.
The eUCP is specific to UCP 500 and, if necessary, may need to be revised as technologies develop, perhaps prior to
the next revision of the UCP. For that purpose, the eUCP is issued in version numbers that will allow for a revision
and subsequent version if the need arises. The eUCP has been specifically drafted to be independent of specific
technologies and developing electronic commerce systems. That is, it does not address specific technologies or
systems necessary to facilitate electronic presentation.
These technologies are evolving and it is left to the specific parties to agree on the technology or systems to be used
to provide for presentation of electronic records in compliance with the requirements of the eUCP.
The eUCP has been created to anticipate the needs of the market for the presentation of electronic documents.
The market, as it is developing, has created a higher standard in anticipation of increased processing efficiencies
when the electronic equivalents of paper documents are presented. In anticipation of this demand and to meet the
market expectation, several changes to the standards established by the UCP have been deemed necessary when an
entirely electronic presentation occurs. These changes are consistent with current practice and the expectations of
the marketplace. In order to avoid confusion between the articles of the UCP and the eUCP, the articles of the eUCP
are numbered with an ‘e’ preceding each article number.”
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Chapter 03
Import Letters of Credit Defined
S.W.I.F.T. Samples and Comments on Specific Fields
This sample is for illustration purposes only.
The letter of credit is presented in S.W.I.F.T. (Society for Worldwide Interbank Financial Telecommunication) format
which is commonly used by major international banks to transmit letters of credit and other messages. S.W.I.F.T.
messages are authenticated, between banks, by the exchange of an electronic key.
SAMPLE OF A LETTER OF CREDIT ISSUED BY BANk OF AMERICA
SENDER: BANK OF AMERICA
TRADE OPERATIONS CENTER
1000 WEST TEMPLE STREET
LOS ANGELES, CALIFORNIA 90012
RECEIVER:
BANQUE AVISANT
PARIS, FRANCE
SWIFT AUTHENTICATED MESSAGE
ISSUE OF DOCUMENTARY CREDIT (TYPE: 700)
:27: SEQUENCE OF TOTAL:
1/1
:40A: FORM OF DOCUMENTARY CREDIT:
IRREVOCABLE
:20: DOCUMENTARY CREDIT NUMBER:
123456
:31C: DATE OF ISSUE:
071024
:40E: APPLICABLE RULES:
UCPLV
:31D: DATE AND PLACE OF EXPIRY:
071130 LOS ANGELES, CA
:50: APPLICANT:
RANDALL COMPUTER, INC.
321 OAK STREET
LOS ANGELES, CALIFORNIA 90000
:59: BENEFICIARY:
PRODUITS ELECTRONIQUES S.A.
15 RUE GEORGES DUMAS PARIS 75009, FRANCE
:32B: CURRENCY CODE, AMOUNT:
USD 134,000.00
:41A: AVAILABLE WITH … BY … :
BANK OF AMERICA
TRADE OPERATIONS CENTER
1000 WEST TEMPLE STREET—7TH FLOOR
LOS ANGELES, CALIFORNIA 90012
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Import Letters of Credit Defined
BY ACCEPTANCE
:42C: DRAFTS AT … :
90 DAYS SIGHT
FOR 100 PCT INVOICE VALUE
:42A: DRAWEE:
BANK OF AMERICA
LOS ANGELES, CALIFORNIA
:43P: PARTIAL SHIPMENTS:
PERMITTED
:43T: TRANSSHIPMENT:
PERMITTED
:44A: PLACE OF TAKING IN CHARGE/DISPATCH FROM/PLACE OF RECEIPT :
PARIS, FRANCE
:44E: PORT OF LOADING/AIRPORT OF DEPARTURE:
LE HAVRE, FRANCE
:44F: PORT OF DISCHARGE/AIRPORT OF DESTINATION:
LOS ANGELES, CALIFORNIA
:44B: PLACE OF FINAL DESTINATION/FOR TRANSPORTATION TO/PLACE OF DELIVERY:
FRESNO, CALIFORNIA
:44C: LATEST DATE OF SHIPMENT:
071120
:45A: DESCRIPTION OF GOODS AND/OR SERVICES:
COMPUTER EQUIPMENT ACCORDING TO P.O. NO. 87654
FCA PARIS, FRANCE
:46A: DOCUMENTS REQUIRED:
SIGNED COMMERCIAL INVOICE IN ORIGINAL AND TWO COPIES.
PACKING LIST IN ORIGINAL AND TWO COPIES.
FULL SET OF CLEAN MULTIMODAL TRANSPORT DOCUMENTS CONSIGNED TO THE ORDER
OF SHIPPER, BLANK ENDORSED, MARKED FREIGHT COLLECT AND NOTIFY BUYER.
:71B: CHARGES:
BANKING CHARGES ARE FOR ACCOUNT OF APPLICANT, EXCEPT FOR DOCUMENTARY
DISCREPANCY CHARGES, IF ANY, WHICH ARE FOR ACCOUNT OF BENEFICIARY.
:48: PERIOD FOR PRESENTATION:
DOCUMENTS MUST BE PRESENTED FOR PAYMENT, ACCEPTANCE / NEGOTIATION WITHIN
10 DAYS AFTER THE DATE OF SHIPMENT, BUT WITHIN THE VALIDITY OF THIS CREDIT.
:49: CONFIRMATION INSTRUCTIONS:
WITHOUT
:78: INSTRUCTIONS TO THE PAYING/ACCEPTING/NEGOTIATING BANK:
1) ALL DOCUMENTS MUST BE FORWARDED IN ONE MAILING, VIA COURIER OR EXPRESS
MAIL SERVICE, TO BANK OF AMERICA, TRADE OPERATIONS CENTER, 1000 WEST TEMPLE
STREET,
LOS ANGELES, CALIFORNIA 90012.
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:72:
SENDER TO RECEIVER INFORMATION:
PLEASE NOTIFY TO BENEFICIARY UNDER ADVICE TO US
ATTN: XYZ SMITH
PHONE: (012) 200—3000
FAX: (012) 200—4000
REGARDS
The preceding letter of credit example is provided for information and illustration only, and does not convey any
engagement or responsibility on the part of Bank of America. The names of the institutions used, except for
the name of Bank of America, and the transaction represented herein are fictitious. Any similarity with actual
institutions and transactions is unintentional and coincidental.
Comments on Specific Fields in Preceding Sample
SENDER: ISSUING BANk
This is the bank that issues the letter of credit (LC) at the request of their client, the buyer (applicant), in favor
of the seller (beneficiary). In the LC sample attached, the issuing bank is Bank of America.
RECEIVER: ADVISING BANk
This is the bank that receives the LC from the issuing bank. In the LC sample attached, “Banque Avisant” is
the bank that would receive the LC and, consequently, the advising bank. Letters of credit are normally sent by
the issuing bank to the beneficiary through an advising bank.
The advising bank has the means to verify the authenticity of the LC before forwarding it to the beneficiary.
However, the advising bank is not responsible for payment. The responsibility for payment rests with the
issuing bank.
40A: FORM OF DOCUMENTARY CREDIT
This field should read IRREVOCABLE. It means that the issuing bank cannot cancel the LC prior to its
expiration date (31D). Although a letter of credit can be issued as “Revocable,” it is rarely issued as such since
most beneficiaries would not accept a revocable LC.
40E: APPLICABLE RULES
This field describes the governing body of law to which the letter of credit is subject with the use of codes.
“UCPLV”, as shown in the example, indicates “UCP LATEST VERSION”.
31D: DATE AND PLACE OF EXPIRY
DATE—The expiry date should allow the beneficiary enough time to make the shipment, and present the
required documents (46A) to the bank where the LC is available (41A), before the LC expires.
PLACE—The place where the LC expires should be the same as the location of the bank where the LC is
available (41A). If the LC states that it is available “With Any Bank,” the expiry place would be the country of
the beneficiary. Both the place where the LC expires and the place where the LC is available to the beneficiary
should be where the beneficiary is located, or where it would be reasonably convenient for the beneficiary to
present documents. In the sample attached, the LC expires in Los Angeles, California.
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Import Letters of Credit Defined
50: APPLICANT
This is the party, usually the buyer, on whose behalf the LC is issued. In the sample attached, the applicant is
Randall Computer, Inc.
On an LC issued on your behalf, check to ensure that your name and address are correct. Any difference
between the information in the LC and the information in presented documents may be considered a
discrepancy.
59: BENEFICIARY
This is the party, usually the seller, in whose favor the LC is issued. In the sample attached, the beneficiary is
Produits Electroniques S.A.
32B: CURRENCY CODE, AMOUNT
The amount specified in the LC should be sufficient to cover the cost of the merchandise, plus any other
expenses to be incurred by the seller. The expenses may include freight, insurance, and other charges. In the
LC sample attached, the shipment is to bemade FCA Paris, France (44A). The costs to the seller extend only
to the point of “taking in charge” of the merchandise. With an FCA shipment, the buyer assumes the costs of
freight and insurance to destination. Besides specifying the amount of the LC, this field will also specify the
currency in which the LC is payable. In the sample attached, the LC has been issued inU.S. Dollars. If the LC
amount is stated in a foreign currency, you bear the risk of exchange rate fluctuations.
41A: AVAILABLE WITH . . . BY . . .
This field identifies the bank with which the credit is available (the place for presentation) and an indication of
how the credit is available.
With—The LC should name a specific bank where the presentation of the document under the letter of credit
must be made (46A). Alternatively, the LC may state that it is available “With Any Bank,” thus allowing the
beneficiary to present documents at any bank of their choice. For practical purposes, however, if the LC states
that it is available “With Any Bank,” the beneficiary would want to present documents at a bank that is
involved in the LC transaction, such as the advising bank. If the LC is restricted to the issuing bank, or names
a bank outside of the beneficiary’s area as the bank where the LC is available, payment may be delayed. In the
sample attached, the LC is available to the beneficiary with Bank of America, Los Angeles, California.
By—All LCs must clearly indicate whether they are available by sight payment, by deferred payment, by
acceptance, or by negotiation. In the sample attached, the LC is available by acceptance because it requires the
beneficiary to present a time draft, payable at 90-days sight (42C). After the beneficiary presents the draft and
required documents to Bank of America, and Bank of America has determined that the draft and documents
are in compliance with the terms of the LC, Bank of America would accept to pay the beneficiary 90 days later.
Hence, the LC is available by acceptance.
42C: DRAFTS AT . . .
A draft is the document that represents the demand for payment that the beneficiary makes under the LC. A
draft may be payable at sight, meaning at the time when it is presented for payment, or it may be payable at
some future time after being presented for payment. In the sample attached, the LC requires drafts payable
at 90 days sight. The time when payment is to be made to the beneficiary is usually determined between
buyer and seller. If the seller gives payment terms to the buyer, or if the buyer requires bank financing of the
merchandise, the LC would require the beneficiary to present a time draft. For further information on drafts,
please refer to the section “Banker’s Acceptances” in the accompanying material.
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Chapter 03
Import Letters of Credit Defined
NOTE: The issuing bank may not always require presentation of a draft. If payment under the LC is to be made
at some future time, and no draft is required, the LC is referred to as a “Deferred Payment Letter of Credit.”
Under this type of LC, since no draft is required, the beneficiary does not have the option of having a draft
discounted, that is, of obtaining payment prior to maturity at an advantageous interest rate.
42A: DRAWEE
This is the bank on whom the beneficiary is instructed to draw the drafts. An LC may require the beneficiary to
draw drafts on the issuing bank, on the advising or confirming bank, or on the reimbursing bank (53A). In the
sample attached, the LC requires drafts to be drawn on Bank of America, Los Angeles, California, the issuing
bank.
43P: PARTIAL SHIPMENTS
Partial shipments may or may not be permitted, or may be permitted within a stated schedule. The beneficiary
should make sure that he can meet the shipping requirements.
43T: TRANSSHIPMENT
This term means that the merchandise is loaded and reloaded from one carrier to another during the course
of carriage. When a shipment is made by air or by combined transport, transshipment should be permitted. In
the LC sample attached, transshipment is permitted.
:44A: PLACE OF TAkING IN CHARGE/DISPATCH FROM/PLACE OF RECEIPT :
This field is commonly used when a multimodal bill of lading is required. It describes the inland point of taking
in charge, dispatch from or initial place of receipt of the merchandise, for onward travel.
:44E: PORT OF LOADING/AIRPORT OF DEPARTURE:
This field describes the port of loading or airport of departure of the merchandise shipment.
:44F: PORT OF DISCHARGE/AIRPORT OF DESTINATION:
This field describes the port of discharge or airport of destination of the merchandise shipment.
:44B: PLACE OF FINAL DESTINATION/FOR TRANSPORTATION TO/PLACE OF DELIVERY:
This field is commonly used when a multimodal bill of lading is required. It describes the inland place of
final destination or place of delivery of the merchandise. General comments about fields 44A, 44E, 44F and
44B: depending on the type of transport document required under a letter of credit and the shipment terms
(Incoterms), either all or some of these fields may be included in the S.W.I.F.T. 700 message.
44C: LATEST DATE OF SHIPMENT
Dates are very important in the LC. The latest date of shipment specified in this field should allow enough time
for the beneficiary to be able to meet the shipment deadline.
45A: DESCRIPTION OF GOODS AND/OR SERVICES
The merchandise description in the LC must be brief. Specific details can be included in the purchase order
or sales contract, but have no place in the LC. If an LC contains excessive details in the description of the
merchandise, or in the terms of the LC, the advising bank may decline to advise it. Also, complex details in
the LC can result in documentary discrepancies. Since the issuing bank could not pay against discrepant
documents, the buyer would have the option to refuse payment. Documents presented under an LC containing
excessive details may be sent to the issuing bank as presented without review by the bank where the
documents are presented. The price basis is usually stated in this field and should be correct. Whether the
Bank of america merrill lynch SolutionS for importerS
Chapter 03
Import Letters of Credit Defined
shipment is to be made FOB port of departure or CIF port of destination, or under any other basis, the price
basis stated in the LC should be according to the trade terms specified in the International Chamber of
Commerce Publication No. 560, “Incoterms 2000.” Also, the price basis should be reflected in the documentary
requirements. In the LC sample attached, the price basis has been stated as “FCA Paris, France.” Accordingly,
under Field 46A, the transport document is to be marked “Freight Collect” and no insurance document is
required.
Use of an incorrect price basis, not in conformity with “Incoterms 2000,”may result in misunderstandings
between buyer and seller and a possible delay in payment. For a complete set of the international rules covering
trade terms, please refer to the International Chamber of Commerce Publication No. 560, “Incoterms 2000.” A
copy can be ordered via the internet at www.iccbooksusa.com.
46A: DOCUMENTS REQUIRED
The documents required for payment should be kept to a minimum. When presented, the documents must be in
strict compliance with the LC terms.
48: PERIOD FOR PRESENTATION
The number of days allowed for presentation of documents after the shipment is made should allow enough
time for the beneficiary to receive shipping documents from the carrier or the freight forwarder, and present all
documents to the bank where the LC is available, within the validity of the LC. The number of days allowed for
presentation of documents should be the difference in the number of days between the latest date of shipment
(44C) and the expiry date (31D). In the LC sample attached, the latest date for shipment is November 20 and the
expiry date is November 30. Consequently, the number of days allowed for presentation of documents is 10 days.
If a letter of credit does not contain a reference to the number of days allowed for presentation of documents,
the number of days allowed for presentation defaults to 21 days, per UCP 600, Article 14C.
49: CONFIRMATION INSTRUCTIONS
This field indicates whether or not the issuing bank is requesting the advising bank to confirm the LC. The
advising bank would only consider confirming an LC at the request of the issuing bank. The beneficiary may
ormay not require confirmation of an LC. It would depend on the strength of the issuing bank, the country
where the issuing bank is located, and the amount of the transaction. If the seller requires confirmation of the
LC, the buyer, in turn, will have to inform the issuing bank, so that the issuing bank will request the advising
bank to confirm the LC. If the advising bank agrees to confirm it, the LC would carry the engagement of the
advising bank, in addition to the engagement of the issuing bank. When the LC is sent to the beneficiary, the
advising bank would notify them if it has confirmed the LC.
78: INSTRUCTIONS TO THE PAYING/ACCEPTING/NEGOTIATING BANk
This field is commonly used for the issuing bank to provide instructions concerning the mailing of documents.
When used to indicate pre-notification of a reimbursement claim, or that pre-debit notification to the issuance
bank is required, the number and type (i.e. banking or calendar) of days within which the issuing bank has to
be notified should also be indicated.
Bank of america merrill lynch SolutionS for importerS
063Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 04
Purchase Order-to-Pay Service
063Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 04
Purchase Order-to-Pay Service
Chapter 04
Purchase Order-to-Pay Service
For the past 10 to 15 years, importers have invested large sums of money to improve the efficiency of their physical
supply chains, moving goods across borders with increased speed and lower costs to meet the demands of an
increasingly competitive marketplace. In many instances, the benefits of an efficient physical supply chain have
fallen short of expectations because of the failure to link the movement of goods with the movement of money, or
with the financial supply chain.
Bank of America is committed to developing solutions to assist you in optimizing and integrating your supply
chains. Our Purchase Order-to-Pay Service can help reengineer your trading processes and unlock substantial
amounts of working capital for you.
The Purchase Order-to-Pay (POto Pay) Service is a supply chain finance solution, which links the buyer’s supply
chain partners into an end-to-end payment and settlement process for increased transparency and visibility
throughout the supply chain. The service replaces paper-based functions with electronic processes and broadens
settlement options by offering open account payments as well as traditional letters of credit.
Through PO to Pay Service, buyers can electronically submit to Bank of America purchase order information that
is used to construct letter of credit (LC) and open account payment instruments for delivery to sellers in paper form
or via an electronic channel, including Bank of America Direct® Trade Services and EDI. The service includes a
matching engine, the Purchase Order Processing System (POPS), which reconciles purchase order data submitted
by buyers with invoice data submitted by sellers prior to payment.
Buyers can also upload a PO file with all of their suppliers’ PO details to automatically create their LCs and/or OA
transactions based on supplier terms and business rules, which streamlines buyers’ processing steps in their daily
work flow.
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Chapter 04
Purchase Order-to-Pay Service
Benefits of Purchase Order-to-Pay (PO to Pay)
Our PO to Pay service offers you several benefits:
• Simplified payment process—Importers no longer have to manage reconciliation of purchase orders to invoice,
packing lists and other shipping documents manually. PO to Pay eliminates these time-consuming tasks
by automating your cross-border trade payment process using business-matching rules. It can also handle
multiple payment terms and can be integrated with major purchase order and ERP systems that you use today.
• more certainty and assurance of payment—For exporters, the major disadvantage of moving to open account
terms is that you lose the payment guarantee offered by letters of credit. With the PO to Pay payment
assurance option, subject to credit line availability, your exporters are assured as long as compliant documents
are presented to Bank of America.
• Flexible financing—Another concern of exporters who are considering the move to open account is the
availability of financing in the absence of a letter of credit. Upon request, your exporters have the ability
to receive pre- and post-shipment financing against qualified open account transactions, subject to credit
availability.
• enhanced security and control—Security is a major concern when transmitting financial data electronically. To
help you maintain the integrity of your documents, all Web-based services offered by Bank of America have
rigorous security standards, including browsers with 128-bit encryption, server-side digital certificates, fire
walls and user access controls.
How PO to Pay works
The importer transmits or uploads a file of purchase orders to Bank of America. Files can be accepted in a variety
of formats and can be sent through various electronic channels (Internet or VAN). In the transmitted file, the
payment type for each transaction is flagged as either “letter of credit” or “open account.” Purchase orders are
housed in an electronic database at Bank of America, establishing the conditions a vendor must meet to receive
payment.
If the transaction is flagged for settlement by letter of credit, purchase order detail is used to issue a traditional
letter of credit to the beneficiary. Both letter of credit and open account transactions are available electronically
to all trading partners who have been granted access to Bank of America Direct® Trade Services, our Web-based
trade management system.
Data matching and payment feature—As goods are manufactured and shipped, vendors present documents to Bank of
America for payment. Presentations may be in paper or electronic form or a combination of both. Key data elements
in the seller’s documents are matched with purchase order data, using an automated mapping engine for electronic
presentations or document checkers for paper presentations. If conditions match, payment is made immediately
for a letter of credit or open account with the “auto-pay” feature. Payment for all other open account payment types
is made immediately after the importer has given approval. If the matching process fails, discrepancy details are
transmitted to the importer for resolution. Once payment is triggered, details can be sent electronically to both the
importer and vendor.
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Chapter 04
Purchase Order-to-Pay Service
Open account payment types
The PO to Pay platform supports three open account payment types:
• Buyer approved, no conditions matching—The purchase orders contain instructions to present documents to
Bank of America. When presented, we convert paper documents into a previously agreed-upon electronic
format that can be processed automatically by the importer or viewed online via Bank of America Direct®
Trade Services. The importer matches details to underlying purchase orders and can either approve or reject
the transaction for payment. Buyers do not have to submit purchase orders to Bank of America.
• Buyer approved, with conditions matching—The purchase orders are sent to both the seller and Bank of America
or only to Bank of America with instructions to advise the open account instrument with purchase order
details to the vendor. As export documents are received, Bank of America matches shipment data with
purchase order data in accordance with parameters established by the importer. Both compliant and noncompliant
presentations are transmitted to the importer for approval to pay.
• Bank approved, with conditions matching (auto-pay)—This option is similar to the “buyer approved” option, except
Bank of America automatically pays against transactions where data matches within agreed tolerance limits
and based on the availability of funds (straight-through processing). If a match is not established, discrepancy
details are transmitted to the importer to be resolved with the seller prior to payment.
No matter what option the buyer chooses, Bank of America provides the status of their payments and
comprehensive management reports.
It pays to have PO to Pay
With Bank of America PO to Pay, you improve communication and data exchange with your trading partners and
move one step closer to a seamless process that fully synchronizes the movement of goods with the exchange of
trading documents, financial data and funds.
Call your Global Trade & Supply Chain Solutions representative today to obtain more information about the
advantages of our PO-to-Pay Service.
Bank of america merrill lynch SolutionS for importerS
067Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of
Credit Documents
067Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of
Credit Documents
Chapter 05
A Closer Look at Letter of Credit Documents
What Are Some of the Typical Documents Required in a
Letter of Credit?
Some of the more commonly required documents include:
Commercial Invoice (see Exhibit A)
The invoice is a record of the transactions between seller and buyer. It is a request for payment. It is also important
to any third party who has an interest in or right to determine the value of a shipment, such as the bank that is
asked to discount a draft or the underwriter who is requested to insure the goods. While in some countries the
commercial invoice is sufficient for customs purposes, generally a consular invoice or a certificate of origin must
be produced for appraisement and entry of goods. When countries accept the commercial invoice as a basis for
customs appraisal, they may insist that the description of the goods on the commercial invoice fit the corresponding
category or description of their active customs tariff. A number of countries make the sending of the commercial
invoice obligatory and require an oath to be signed at the foot of the paper stating that the values shown are
entirely in accordance with the facts.
The commercial invoice generally gives terms, price, and all details necessary for the proper description of the
merchandise as well as the gross amounts and net amounts due. The invoice should be numbered, show the date
when it is prepared and the address of the shipper. The price information may include the net unit or total price,
and all charges connected with the shipment, including such commissions as may have been agreed upon. In the
case of a draft, the interest of the draft could be added, being computed in advance on the basis of the terms of
the draft (sight, 30 days, 60 days, and so forth), plus the time it will take for the draft to reach the destination.
Other components of the invoice could include: marks and numbers, quantities, number of packages, weights and
measurements, tare (when necessary), packed and unpacked, the date of shipment, fax number, and telephone
numbers of the seller and/or buyer, per unit, gross costs, etc.
Bank commissions and all other charges should also be added to the commercial invoice if the buyer has to pay for
them. In cases where the buyer pays for freight, insurance or any other items, these should be added, just the same
as consular fees, cartage, lighterage, telecommunication fees, customs fees, and any fees for certificates (such as of
health or analysis), provided that the sale makes the buyer liable for any or all of them.
Certificate of Origin (See Exhibit B)
A certificate of origin certifies that goods were mined, manufactured or assembled within a certain country. A
number of countries have apportioned space on the consular invoice to show the country of origin of each item on
the invoice, obviating the necessity for a separate certificate. The reasons for requiring such a certificate vary. It is
demanded and needed by governments or countries whose tariff laws favor certain countries, or which have made
agreements with certain countries, to determine such favored tariff rates. These favorable tariff laws necessitate
(for goods brought in from favored countries) a certificate of the actual origin of the articles imported and of the
fact that they come from the country or countries enjoying such special tariff privileges or favors.
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Chapter 05
A Closer Look at Letter of Credit Documents
The certificate, known as the certificate of origin, therefore enables the importing country to determine, through
its customs officers and administration, which shipments or goods shall benefit by such preferences. It contains
generally the same information as the consular invoice. This certificate is then presented by the importer to
customs officials to show the origin of the goods so that special preferential tariff rates, discounts from regular
tariff rates, or other deductions granted in agreements existing between the countries of buyer and seller, or favors,
can be taken into consideration.
Consular Invoice
These invoices may be required by various countries for customs or for statistical or other reasons. They must
contain full details and description of the shipment, to be used as evidence of the shipper’s owner’s declaration
of the value of the shipment. They are certified by the consul of the country to which the shipment is destined,
and generally include a sworn statement not only as to the truth of the declarations made, but also as to the
nonexistence of any other invoice for the same shipment. The consular invoice must show all details of the goods
themselves, as well as all discounts, rebates, or the like. The consular certificate or invoice facilitates customs work
at destination as well as collection of taxes, and also serves for statistical purposes.
The number of copies of the consular invoice which must be presented when a visa is requested will vary
considerably with the country and the set-up of its consular and customs offices. The consul always keeps certain
copies, partly for his or her own files and partly to be forwarded to the customs officers in the place of destination.
The number that are retained depend upon the country. The copies which the consul returns to the shipper are for
the exporter to forward to the importer for presentation to customs when the exporter declares the goods. They
should arrive as close to the arrival time of the goods as possible (preferably not later than the shipment). Delay in
receipt of documents is frequently penalized heavily by the customs department of the importing country.
Generally the consular invoice is a copy of the commercial invoice in the language of the importing country, supplied
in two to ten copies, which gives full details of the merchandise shipped (see above). The invoice must show also, in
addition to information about the materials or merchandise, the name and nationality of the vessel that carries the
cargo, the port of shipment, and the port or point of destination.
Inspection Certificate
An inspection certificate testifies to the inspection of exported or imported goods. If it is needed, this documentary
requirement should be clearly stated in quotation and sales contracts. In regard to many staple commodities sold
against letters of credit, on grade designation entirely, such as raw cotton, the buyer provides for inspection or
warehouse certification of the goods before shipment to avoid loss due to deviation from standard grade. Inspection
before shipment is also provided in many sales contracts on expensive machinery or equipment. An inspection from
an independent third party may be requested under a letter of credit.
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A Closer Look at Letter of Credit Documents
Insurance Policy or Certificate (see Exhibit C)
An insurance policy or certificate should be required for presentment under a letter of credit if the arrangement
between buyer and seller indicates that the seller should purchase the insurance. Cargo Insurance serves to protect
the shipment of merchandise against loss or damage during transit.
Whether or not the buyer or seller is required to purchase insurance for shipped merchandise depends upon
the type of transaction specified in the contract or purchase order. For example, if the seller is contracted to
deliver merchandise to the buyer FOB (Free On Board), then the buyer/importer is responsible for insuring the
goods against risks while in transit. See Chapter 9 of this guide for an in-depth explanation of all shipping terms
(Incoterms) and insurance responsibility under each term. Carrier and shipping firms are not required to provide
insurance for cargo they are instructed to deliver.
Seeking insurance for merchandise is a straightforward process that many merchant insurance firms and
freight forwarders will provide. Regular importers frequently use an open cargo policy that provides coverage
from warehouse to warehouse, depending upon the terms. This provides automatic coverage for the merchandise
throughout the shipping process.
These policies usually provide all risk, in addition to warehouse to warehouse coverage, and similar coverage for
airfreight and parcel post shipments. Policies for one-time shipments are also available. These are often used
by infrequent importers, who arrange these policies with their freight forwarders. With few exceptions (bulk
agricultural products and hazardous materials), it is usually preferable for importers to use only warehouse to
warehouse or door to door insurance policies for whatever risks are being covered. This assures that all transit
points are covered.
Insurance costs vary according to the extent of coverage, the risks specified, and any additional coverage requested
by the purchaser. Typical coverage for a policy is 110 percent of the CIF (Cost Insurance and Freight) value. This is a
common level of coverage, since it is the default level of coverage according to UCP 600.
Packing/Weight List (see Exhibit D and E)
The list which shows, item by item, the contents of cases or containers with each item listed separately, and its
weight and description set forth so as to permit checks by customs on arrival, as well as by the recipient of the
goods. It must be accurate and must satisfy both buyer and customs.
Bill of Lading (see Exhibits F)
The bill of lading is the receipt for the goods received by or loaded on a carrier and the contract between the
shipper and the carrier. The contract stipulates where the goods are to be delivered, the freight charges to be
paid, when and by whom. This receipt for the merchandise, therefore, whether issued by a steamship company or
by other carrier (railway, air carrier, and so forth), represents a definite agreement between shipper and carrier.
The conditions of the bills of lading are not uniform and depend upon the nature of the carrier, the conditions and
usages at port of shipment or destination, and other individual factors and requirements. The bill of lading may
also convey title to the goods to which it refers and can be used to transfer such ownership of the goods with certain
exceptions.
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Chapter 05
A Closer Look at Letter of Credit Documents
For all these reasons, the carrier or its agent generally will refuse to deliver the goods covered by a negotiable bill
of lading without the bill being produced, duly signed or endorsed. Customs considers the holder of a duly signed or
endorsed bill of lading to be the owner of all merchandise on such bill of lading issued by a common carrier. The bill
itself is regarded as constituting the best evidence of the right to make entry. Some countries require legalization
of the bill of lading by their consul at the place or port of shipment to give official proof of the accuracy of the bill as
regards to the origin, quantity, and mode of shipment of the merchandise.
Ocean Bill of Lading
An ocean bill of lading is a receipt for the goods delivered to or on board a vessel, specifying the conditions and
terms of carriage, the character of the goods shipped, and their weights, measurements, and destinations, as well
as the person to whom the goods are consigned or who is to be notified of their arrival. The bill of lading does not
convey title to the goods until it is properly endorsed. It is created by the shipper and must be based on the dock
receipt that the steamship line issues on receiving the cargo at the pier, the dock receipt being exchanged for the
bill of lading.
Usually, three bills of lading are signed, although the various shippers may ask for more unsigned (and therefore
not negotiable) copies for different purposes and uses in their offices. For shipments going to certain countries, it is
necessary to present the bill of lading for customs along with the other documents; otherwise, it will not be usable at
the destination.
Ocean bills of lading are issued as straight bills of lading and order bills of lading. The former is a non-negotiable
document by which the transportation company acknowledges receipt of cargo and contracts to move it. It is
not always necessary to surrender the original copy for delivery of cargo. The order bill of lading is a negotiable
document acknowledging receipt of cargo and contracting to move it. Surrender of the original properly endorsed
B/L is required on delivery of the cargo. The ocean bills f lading are of two classes, “received for shipment” and
“shipped” or “on board.” The former is issued for a named steamer in which space has been previously reserved and
goods are in the possession of the steamship company; the latter is issued only after the goods have been loaded on
the vessel. Banks often require “on board” bills of lading when issuing a letter of credit.
The ocean bill of lading is not only the final receipt from the carrier, but is a contract between the carrier and
shipper. It may be used as a negotiable document. Drafts or bills of exchange to which are attached the shipper’s
invoice, ocean bill of lading, and insurance policy constitute methods commonly used in making foreign-trade
financial settlement. The freight charges generally must be paid before the steamship company surrenders the
cargo.
Straight Bill of Lading
A straight bill of lading is a bill of lading made out to a named consignee. It is not negotiable and is therefore issued
for shipments to a specified person.
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Chapter 05
A Closer Look at Letter of Credit Documents
Bill of Lading to Order
This is a bill of lading made out to the order of, and endorsed by, the shipper either in blank or to a named
consignee. The purpose of this type of bill of lading is to protect the shipper against buyers obtaining possession of
the goods before they have paid or accepted the relative draft. A steamship company will not deliver goods covered
by a “to order” bill until ownership is proven by presenting the original endorsed bill. However, problems exist in
connection with “to order” bills of lading for Latin American countries, where delivery of incoming cargo is the
function of the customs authorities and is not entrusted to steamship lines or their agents. The laws of a few Latin
American countries prohibit “to order” bills of lading, and in some other Latin American countries, these bills are
not accorded the same protection as in Europe and the United States.
Important Note: In shipping parlance, a distinction is made between a bill of lading made out to the order of the
shipper and a bill made out to the order of the buyer. The latter bill does not give shippers as much protection as a
bill drawn to their own order. As a rule, when a bill of lading is to the order of a buyer, the buyer can get the goods
from a steamship line without presenting the bill of lading by posting a bond.
Negotiable Bill of Lading
When an order bill of lading is endorsed in blank, it becomes negotiable and the carrier will deliver the goods
to whoever presents the endorsed bill of lading. While all original bills of lading (full set) are negotiable, one
is sufficient to obtain goods. On the other hand, if bills are drawn to order of the consignee, the consignee’s
endorsement makes it negotiable. If they are drawn to order of the shipper, the shipper must endorse it before it
can be transferred and, therefore, before the goods it represents can be conveyed to a third party. The endorsement
itself can be made to a specific third person or firm, a bank, or in blank; while one endorsed copy is sufficient,
the full set of originals should be endorsed. In addition to the original endorsed bills of lading, remaining copies
generally are kept by the shipper and carrier for their records.
Original Bill of Lading
This is the original bill of lading, which is negotiable, provided that it is a “to order” bill. Generally three such
“originals” are issued, known as a “full set,” with the carrier marking the total number of the originals on each
original issued. When negotiating the originals, the bank will require the full set, although one of them, properly
endorsed, is sufficient to obtain the goods. If delivery is made against one of the bills of lading, the others are
thereby automatically rendered void (see “Bill of Lading” on p.70).
Full Set Bill of Lading
When more than one negotiable bill of lading is issued, the number of such total issued is marked on each
individual document, and the banks generally insist on receiving the total number of bills issued, or the “full set.”
Extra copies generally are kept by the steamship company and shipper (see Bill of Lading on p.70).
Foul Bill of Lading Versus Clean
A bill of lading is called foul when, contrary to the clean bill of lading, it shows by marginal notes, rider, or otherwise
that all or part of the shipment to which it refers is in bad condition or damaged.
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Chapter 05
A Closer Look at Letter of Credit Documents
Multi-Modal Transport Document
This is a bill of lading covering shipment on one and the same (straight or to order) bill of lading from point of
shipment to port or point of destination, involving transportation by more than one carrier. It is also the term used
for a bill of lading issued by a steamer from port of shipment to either an out port or to a point inland in the country
of destination, including any transshipment or land carriage necessary to make such delivery.
Air Waybill
An Air Waybill is similar to an ocean bill of lading, except that it is restricted to shipment by airfreight. A major
difference between the two is that the air waybill is always non-negotiable. It is the contract between the shipper
and the airfreight carrier, limited to the conditions stated on the air waybill such as the destination and recipient.
An air waybill is normally issued in one original, with several copies.
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit A Sample Copy Only
BENEFICIARY:
DEMO
BENEFICIARYCO.
DEMO
STREET
DEMO
CITY
HONG
KONG,
HONG
KONG
COMMERCIAL
INVOICE
Date:
10
Jan
2007
Invoice
No:
B/LNo:
Vessel:
Shipped
from:
JAKARTA,
INDONESIA
Shipped
To:
SAN
DIEGO,
USA
SOLD
TO:
BUYERS
INTERNATIONAL
315
PTATANGO
MANGO
BULILIMAH
KTABOROON,
CA11203
Letter
of
Credit
No:
M1241204NS00178
Issued
By:
IMPORTER’S
ISSUING
BANK
NAME
Additional
Information
(for
this
shipment
only)
MERCHANDISE
DESCRIPTION:
LADIES BLOUSES AS PER PO. NO. 12345 LADIES
BLOUSESAS
PER
PO.
NO.
12345
ITEM:
QUANTITY:
PRICE:
Invoice
Total:
10,000.00
(USD)
Authorized
Signature:
Name:
Title:
Certification
Statement
If
Required:
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit B Sample Copy Only
CERTIFICATE
OF
ORIGIN
EXPORTER:
DEMO
BENEFICIARYCO.
DEMO
STREET
DEMO
CITY
HONG
KONG,
HONG
KONG
DATE:
10
Jan
2007
OTHER
REFERENCES:
LC
NO:
M1241204NS00178
SALES
ORDER:
INVOICE
NO:
B/LNO:
SOLD
TO:
BUYERS
INTERNATIONAL
315
PTATANGO
MANGO
BULILIMAH
KTABOROON,
CA11203
COUNTRY
OF
ORIGIN
OF
GOODS:
CONSIGNEE:
MIZUHO
BANK
NOTIFY:
AIRPORTS AUTHORITY
JAKARTA, KASAFDARJUNG
AIRPORT, JAKARTA
AIRPORTSAUTHORITYINDONESIA
INDONESIAINDONESIA
JAKARTA,
KASAFDARJUNG
AIRPORT,
JAKARTA
REMARKS:
WE CERTIFY THE ORIGIN OF THE
GOODS IS THE Y OF INDONESIA.
WE
CERTIFYTHA
THATHA
T
TT
THE
ORIGIN
OFTHE
GOODS
ISTHE
COUNTR
COUNTRCOUNTR
Y
OF
INDONESIA
COVERING:
LADIES BLOUSES AS PER PO.NO.LADIES
BLOUSESAS
PER
PO.
NO.
12345
1234512345
ITEM
NO:
DESCRIPTION:
ORIGIN:
QUANITY:
THE
UNDERSIGNED
HEREBYDECLARE
THATTHEABOVE
DETAILSAND
STATEMENTSARE
CORRECT
AUTHORIZED
SIGNATURE:PLACE
AND
DATE:
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit C Sample Copy Only
ARCH
INSURANCE
COMPANY
A
Missouri
Corporation
Home
Office:
3100
Broadway,
Suite
511,
Kansas
City,
MO
64111
Administrative
Office:
One
Liberty
Plaza,
53rd
Floor,
New
York,
NY
10006
Tel:
800-817-3252
Certificate
of
Insurance
ORIGINAL
THIS
CERTIFICATE
REQUIRES
ENDORESEMENT
IN
THE
EVENT
OF
ASSIGNMENT
Broker:
Global
Solutions
Insurance
Services,
Inc.
Redondo
Beach,
CA90278
ASSURED
POLICY
NO.
71-OCP1597700
CERTIFICATE
OF
INSURANCE
NO.
71-1710
EXPORT
REFERENCES
UTLIMATE
CONSIGNEE
and
INSURED
DESTINATION
FORWARDED
AGENT
/
REFERENCES
POINT
AND
COUNTRY
OF
ORIGIN
CA U.S.A
NOTIFY
PARTY
(not
applicable
to
insurance
certificate)
DOMESTIC
ROUTING/EXPORT
INSTRUCTIONS
(not
applicable
to
insurance
certificate)
PIER
OR
AIRPORT
LOS ANGELES, CA U.S. PORT
EXPORTING
CARRIER
PRESIDENT TRUMAN 164
PORT
OF
LOADING
LOS ANGELES, CA U.S.
ONWARD
INLAND
ROUTING
PORT
AIR/SEA
PORT
OF
EXCHANGE
NAHA, OKINAWA, JAPAN
FOR
TRANSHIPMENT
TO
PARTICULARS
FURNISHED
BY
SHIPPER
MARKS
AND
NUMBERS
NO.
OF
PKGS
DESCRIPTION
OF
PACKAGES
AND
GOODS
&
SPECIAL
INS
CONDITIONS
GROSS
WEIGHT
MEASUREMENTS
124
1x40HC SLAC:
PKGS
DESCRIPTION OF GOODS AND/SERVICES
CONSTRUCTION MATERIALS AND EQUIPMENT
CIF NAHA, OKINAWA, JAPAN
L/C:
110 PERCENT OF THE INVOICE VALUE INCLUDING ICARGO CLAUSES (ALL RISKS).
INSURANCE CLAIMS TO BE PAYABLE IN JAPAN IN COF DRAFTS.
NU1420.00L
6428.29K
STITUTE
RRENCY
2170.000F
61.454M
B/L
DATE
INSURED
VALUE
$
AMOUNT
IN
WORDS
DOLLARS
CONDITIONS
OF
INSURANCE
ON
REVERSE
SIDE
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit D Sample Copy Only
BENEFICIARY:
DEMO
BENEFICIARYCO.
DEMO
STREET
DEMO
CITY
HONG
KONG,
HONG
KONG
WEIGHT
LIST
Date:
Jan
SOLD
TO:
BUYERS
INTERNATIONAL
315
PTATANGO
MANGO
BULILIMAH
KTABOROON,
CA11203
10
1010
JAN
2007
20072007
Invoice
No:
S.O.
No:
SHIPTO:
BUYERS
INTERNATIONAL
315
PTATANGO
MANGO
BULILIMAH
KTABOROON,
CA11203
Letter
of
Credit
No:
M1241204NS00178
Drawn
Under:
IMPORTER’S
ISSUING
BANK
NAME
NOTIFY:
AIRPORTS AUHTORITY INDONESIA
JAKARTA, KASAFDARJUNG
AIRPORT, JAKARTA
MERCHANDISE
DESCRIPTION:
LADIES BLOUSES AS PER PO. NO. 12345LADIES
BLOUSESAS
PER
P.O.
NO.
12345
ITEM:
NETWEIGHT:
GROSS
WEIGHT:
We
certify
this
document
is
true
and
correct.
Authorized
Signature:
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit E Sample Copy Only
BENEFICIARY:
DEMO
BENEFICIARYCO.
DEMO
STREET
DEMO
CITY
HONG
KONG,
HONG
KONG
PACKING
LIST
Date:
10
Jan
2007
B/LNo:
Vessel:
Shipped
From:
JAKARTA,
INDONESIA
Shipped
To:
SAN
DIEGO,
USA
Invoice
No:
SOLD
TO:
BUYERS
INTERNATIONAL
315
PTATANGO
MANGO
BULILIMAH
KTABOROON,
CA11203
Letter
of
Credit
No:
M1241204NS00178
Issued
By:
IMPORTER’S
ISSUING
BANK
NAME
MERCHANDISE
DESCRIPTION:
LADIES BLOUSES AS PER PO. NO. 12345 LADIES
BLOUSESAS
PER
P.O.
NO.
12345
ITEMS:
PACKAGES:
QUANTITY:
NETWEIGHT:
GROSS
WEIGHT:
COMMENTS:
PACKING LIST COMMENTS HERE
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit F Sample Copy Only
SHIPPERCONSIGNEENOTIFYPARTYINTERMEDIATECONSIGNEEINITIALCARRIAGEPLACEOFRECEIPTEXPORTCARRIERPORTOFEXCHANGEB/LTOBERELEASEDATSERVICECENTERMPREPAIDU.S.$
Vessel:VoyagerTOTALCOLLECTTOTALPREPAIDAuthorizedSignatureCOLLECTU.S.$LocalCurrencyBLnumber:APLU 098033266
ConditionsonReverseSideOCEANFREIGHTPAYABLEATPLACEOFDELIVERYPARTICULARSFURNISHEDBYSHIPPERExportValuationMARKS&NO.s/CONTAINERNO.SNO.OFPKGSH.M.STNEMERUSAEMTHGIEWSSORGSDOOGDNASEGAKCAPFONOITPIRCSEDPORTOFLOADINGPAGEEXPORTREFERENCESFORWARDEDAGENT(ReferencesF.M.C.No)
POINTANDCOUNTRYOFORIGINOFGOODSALSONOTIFYB/LNUMBERCNTRY: US
1 OF 1
J.E. LOWDEN & CO FMC87NF CHB5118
275 BATTERY STREET SUITE 400
SAN FRANCISCO CA 94111
TEL:415-781-7040
FAX:415-392-3970
NO SED REQUIRED, AES 942267037-SF010
5028
CTR NBR SEAL NBR T/S MODE QUANT/TYPE
CRLU910345-9 4492 R40 CY/CY 1440 CTNS
SHIPPER’S WEIGHT LOAD AND COUNT
THESE COMMODITIES, TECHNOLOGY OR SOFTWARE WERE EXPORTED FROM
THE U.S. IN ACCORDANCE WITH THE EXPORT ADMIN. REGULATIONS.
DIVERSION CONTRARY TO U.S. LAW IS PROHIBITED.
ON BOARD APL BELGIUM 107 ON AUG.28, 2007 AT OAKLAND
APLU 098033266
NON-NEGOTIABLESEAWAYBILLAPL BELGIUM 107
KAOHSIUNG KEELUNG
1440
NO M/N
43200#
19595K 1-40 FT CY/CY CONTAINER/S SL&C
CARTONS
FRESH NECTARINES
UNDER REFRIGERATION
MAINTAIN TEMPERATURE 34 DEGREES F
VENT SETTING: 0015 CFM
FREIGHT PREPAID
NLR
OAKLAND
PaymentbyChequetobemadetotheorderofAPL-Co.ED.Ltd.
NON-NEGOTIABLECOPYThisBillofLadingisgovernedbyandsubjecttothetermsandconditionsofAPL’sBillofLading,whichmaybefoundonthereversesideofthisdocumentorobtainedonyourHomeportat:
www.apl.comorbyAPLuponrequest.
Date:AUG. 28, 2007 AmericanPresidentLines,Ltd.,TheCarrierPlaceIssued:SERVICE CENTER By:
APL
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit G Sample Copy Only
SHIPPER/IMPORTERCONSIGNEE(Notnegotiableunlessconsigned“toorder”)
NOTIFYPARTYPRE-CARRIAGEBYPLACEOFRECEIPTOCEANVESSEL/VOY.NO.
PORTOFDISCHARGENo.ofOriginalsByPlaceandDateofB/LIssue:TotalsPayAt:
PLACEOFDELIVERYContainerNo.;SealNo.;MarksandNo.sTypeorKindofContainersorPackages-DescriptionofGoodsPORTOFLOADINGBOOKINGNO.
EXPORTREFERENCESFORWARDINGAGENTAlsoNotify--ExportInstructionsforMerchant’sReferenceOnlyB/LNUMBER600781434-A
FMC# 0087
J.E. LOWDEN & CO
275 BATTERY ST., STE 400
SAN FRANCISCO CA 94111
TO ORDER OF SHIPPER
THESE COMMODITIES, TECHNOLOGY, OR SOFTWARE WERE
EXPORTED FROM THE UNITED STATES IN ACCORDANCE
WITH THE EXPORT ADMINISTRATION REGULATION.
DIVERSION CONTRARY TO U.S. LAW PROHIBITED.
MOLU600781434
BILLOFLADINGNON-NEGOTIABLE(COPY)
MOL DISCOVERY
NAGOYA NAGOYA -CY
MCTU0015535/0008087/C4
MOLU0023233/0008085/C4
MOGU0044804/0008175/C4
TRIU9731550/0008156/C4
CAXU9774887/0008155/C4
SED Not Required -AES 942267037-SP01051660
FREIGHT PREPAID. SHIPPER’S LOAD AND COUNT.
5 x 40’ HIGH CUBE CONTAINERS
SAID TO CONTAIN:
3F678.89101BL00.88948SGAB04033M008.882GK00.05583ETILREPLADEN ON BOARD THE VESSEL MOL DISCOVERY VOY NO 016M AT OAKLAND, CA ON 09-26-2007
OFR
BCG
DOCUMENT
JAPAN TWC
5.000 40
5.000 40
1.000 BL
5.000 40
0110081A02
OAKLAND, CA UNITED STATES
OAKLAND, CA -CY
GrossWeightMeasurementsMitsuiO.S.K.Lines,Ltd.
MitsuiO.S.K.Lines,Ltd.,asCarrierPointandCountryofOriginofGoods(forMerchant’sReferenceOnly)
LoadingPierTerminalFinalDestinationforMerchant’sReferenceNo.ofContainersorPackagesTotalnumberofContainersorotherpackagesreceivedbythecarrier(inwards):
CodeTariffItemBasisFreightedAsCurr.RatePerPrepaidCollectParticularsfurnishedbyShipperCRB# 511B
OAKLAND -TRAPAC PORT
FIVE CONTAINERS
PC
PC
PB
PC
40
40
BL
40
USD
USD
USD
USD
600.00000
140.00000
25.00000
240.00000
3000.00
700.00
25.00
1200.00
LADEN ON BOARD THE
VESSEL 09-26-2007 THREE SAN FRANCISCO 09-26-2007
USD 4925.00
SAN FRANCISCO
ConditionsonReverseSide
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Frequently Asked Questions
What documents should I require?
You may request the issuing bank to stipulate any of the above or additional documents that you may need or want.
In addition, you should have your customs broker verify that all documents that are required in order to clear the
goods through customs have been stipulated. While letters of credit are very flexible, one common-sense rule is to
exclude excess detail in the letter of credit, as well as requirements for documents that the seller cannot provide.
If you attempt to include documents or conditions in the letter of credit that the seller finds objectionable, they will
most likely contact you with a request for an amendment before shipment is made. This invariably will cause delay
and additional cost.
What happens when the seller does not submit all of the required documentation?
It is your bank’s obligation to examine the documents received from the seller’s bank with the utmost care, and
make payment only when all documents conform to the letter of credit that was issued on your instructions. If
the issuing bank discovers discrepancies in the documents, they will contact you, list the discrepancies found for
your consideration, and inquire as to whether you wish to authorize payment. You must make a decision within a
reasonable time period to avoid the possibility of the seller arranging for the return of the merchandise or the sale
of the merchandise to a third party.
What internal controls does the bank employ to ensure accurate documentary review?
How does the bank measure quality of service?
Bank of America exercises due diligence and care when examining documents presented under letters of credit
in accordance with the guidelines of Uniform Customs and Practice for Documentary Credits (UCP). We have
established several levels of checking to ensure our documentary review meets your requirements. Your letters of
credit and documents will be checked by our experienced trade specialists who are familiar with your processing
and document requirements. Each trade specialist has a specific delegated authority regarding negotiation.
For any transaction over that specific dollar amount, an additional review is required. A trade specialist will
review all the transactions again to ensure they are in compliance with both your requirements as well as the
International Standard Banking Practice (ISBP). Our trade operations managers also perform periodic reviews of
the transactions in order to maintain consistent service quality and accuracy.
We measure quality using the following five key elements:
• Timeliness
• Responsiveness
• Accuracy
• Courtesy
• Knowledge
With our strong commitment to service quality, we have set up a system of measurements. All transaction
processing times and customer inquiries are recorded by our system automatically. Our trade operations managers
review these service levels on a regular basis to ensure that our service standards are met. Historically, the review
process mentioned above has resulted in an adherence rate that consistently exceeds 95%.
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
A Discussion of the International Standard Banking Practice for the
Examination of Documents under Documentary Credits (ISBP)
In November of 2002, the National Committees of the International Chamber of Commerce (ICC) Banking
Commission voted overwhelmingly to adopt the International Standard Banking Practice for the Examination of
Documents under Documentary Credits, also known as the ISBP. It is believed that the adoption of the ISBP will
reduce the number of rejections by banks of documents under documentary credits. The ISBP was updated in July
2007 to bring it in line with UCP 600.
The ISBP was written to help businesses that follow the International Chamber of Commerce’s internationally
accepted rules for letters of credit, the Uniform Customs and Practice for Documentary Credits (UCP). Currently,
it is reported that discrepancies in letter of credit documents found by banks in the interpretation and application
of the UCP have led to 60-70% of documents being rejected on first presentation. As letters of credit are one of the
chosen methods of payment for financing world trade, these rejections have been slowing trade and at times have
led to costly disputes and court cases.
The ISBP has been written as a supplement to the UCP, and explains how theUCP applies to day-to-day practice. It
does not amend the UCP, but explains how the practices articulated in the UCP are to be construed by businesses
worldwide.
The ISBP deals with some of the following most-questioned practices:
• Alterations: What constitutes an “alteration” or “addition” to a document and when and how should these be
authenticated?
• Drafts: What constitutes a proper endorsement? When does “sight” really occur when documents are
discrepant? How should alterations on drafts be treated?
• Signing of documents: How should documents be signed if not expressly stated in the letter of credit?
• Applicant and beneficiary addresses: How should obvious typing errors in the name and address on documents
be handled? What about different addresses of the same company?
• Trade terms: Must trade terms, such as Incoterms, appear on the commercial invoice and other documents?
• Mathematical calculations: How to deal with mathematical calculations appearing on invoices and other
documents.
• Combined documents: Should a beneficiary’s certificate, when required under a letter of credit, appear on the
invoice or be included as a separate document?
• Transport documents: What constitutes the “face” of a document?
• Insurance documents: What constitutes a full set? What constitutes a proper endorsement? How does one
determine the effective date?
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Potential benefits of the ISBP to trade business are significant:
• As an importer or applicant of a letter of credit, you can look forward to faster receipt of import documents,
avoiding demurrage charges and delays in the receipt of goods and ultimately reducing the cost of goods.
• Banks are anticipating that this new consistency will enhance straight-through processing and significantly
reduce the amount of time spent on dealing with discrepancies in their back offices.
• Your supplier, the beneficiary of your letter of credit, should realize improved cash flow and efficiency as a
result of their improved knowledge of document preparation and presentation requirements.
• The complex nature of the letter of credit will no longer be an obstacle, but an asset to the participants and to
the future growth of world trade.
The full text of the International Standard Banking Practice for the Examination of Documents under Documentary
Credits can be ordered from the ICC Bookstore at www.iccbooksusa.com.
Bank of america merrill lynch SolutionS for importerS
084Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
084Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
Chapter 06
Documentary Collection for Importers
Documentary collections were introduced in the first chapter of this guide, which explored the inherent collection
risk factors of buyers and sellers in addition to basic background information. This section expands upon that
information with definitions, a flowchart and significant additional information.
What are bank collections?
Bank collections are the delivery through banking channels of various commercial and shipping documents for
release to a buyer against either payment or acceptance of financial instruments.
What are documents?
Documents are financial and/or commercial instruments.
a.
Financial documents include bills of exchange (drafts), payment receipts, checks, promissory or demand
notes, or other similar instruments.
b.
Commercial/shipping documents include invoices, bills of lading, shipping receipts, title documents,
commercial certificates (weight, origin, packing, etc.) or any other documents not interpreted as financial
documents.
What are clean versus documentary collections?
Clean collections are collections of financial documents without attached commercial documents. Documentary
collections are collections of commercial documents and may or may not have financial documents attached.
Who are the parties to a collection?
The involved collection parties consist of the “drawer,” or the party that requests the collection process through
his/her bank called the “remitting bank.” A “collecting bank” is the bank that makes the ultimate proposal for
acceptance or payment of documents to the final party under the collection order, known as the “drawee”.
What are foreign collections?
Foreign collections through banks are a time-proven, low-cost method of collecting money. Collections abroad can
involve a variety of items in the form of documents that companies or individuals are trading for a payment or
a promise of payment of money. Banks are entrusted with these items for their proper release when acceptance
or money is obtained as instructed. The charge for this service is usually a nominal flat fee, plus out-of-pocket
expenses.
What are the benefits of collections for importers?
When you are dealing with a familiar trading partner, you should consider using documentary collections. A
documentary collection is a secure alternative to the risk of paying cash in advance, and it does not tie up your
credit facility.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
Why use Bank of America for documentary collections?
Savvy importers know when and how to protect themselves from unfamiliar trading partners and risky
marketplaces. You rely on, and know how to leverage, established trade partnerships to ensure prompt delivery
of the goods you need. Maintaining sound relationships with your suppliers while safely managing the process of
receiving title to the goods you ordered are two ingredients of a successful trade partnership.
Documentary collections can work to your advantage because payment is contingent on your bank receiving and
holding the documents that you will rely on to obtain your goods. These shipping documents—which you and your
seller agree to in advance—could include bills of lading or other title documents, commercial invoices, packing lists,
certificates of origin or inspection certificates.
When Bank of America receives documents from your supplier or your supplier’s bank, our collection staff records
the collection and notifies you that your supplier has delivered proof of shipment. You then either pay for the goods
or accept a time draft, depending on the terms you’ve agreed to with your supplier. In either case, title documents
will be released so that you can obtain your goods. When you pay or the shipment, we remit payment to your
supplier through the collecting bank.
Here again, Bank of America’s Web-based product, Bank of America Direct® Trade Services, can be utilized to
process these transactions and provide the comprehensive reporting so critical to your business.
The two types of documentary collections are distinguished by the timing of the payment:
• Documents against payment (also known as sight draft or cash against documents)—you pay Bank of America;
we release the documents giving you title and forward your payment to your supplier’s bank.
• Documents against acceptance (financing agreed to in advance with your supplier)—you sign a time draft
promising to pay for the goods at a future date. Once you accept the draft you receive title documents.
Bank of America can receive documents from your supplier’s bank, or directly from your supplier. Either way, you
can be sure that you will be notified promptly and that you will receive the documents upon acceptance or when
payment has been made. That means no matter what the distance is between you and your supplier, you will receive
documentation promptly.
Bank of America makes it easy to establish an incoming documentary collection relationship in three simple steps:
01. Complete our easy-to-use Incoming Documentary Collection Agreement.
02. Submit the completed application to your local Bank of America banking center or Trade Services office.
03. Instruct your supplier to send collection documents to a Bank of America Trade Operations Center as the
presenting bank. Naming Bank of America as your presenting bank for import documentary collections
means that you will be working with a bank you know and trust.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
How are collections sent?
Collections may be sent to collecting banks by courier service (e.g., Airborne, FedEx, DHL), express airmail or
regular airmail. In the past it has been customary for sellers to deliver documents to their bank for transmittal as
mentioned. The documents would be accompanied by a precise letter of instruction, which the seller’s (remitting)
bank could transcribe on its own collection letter form. Today, however, many banks provide a service called direct
documentary collections. This is an arrangement that enables the exporter to send documents, drafts and collection
letters to the buyer’s bank. The purpose is to save time that would otherwise be required to pass the collection
through the exporter’s bank first. The seller sends a copy of the collection letter to his/her bank, which follows up on
the collection.
Commercial documents
As with letters of credit, the basic instrument through which payment is obtained is a draft. This is an order for
the payment of money drawn by one party, the drawer, on another, the drawee. Drafts may be payable at sight upon
presentation or at a fixed future date, e.g., 60 days from presentation. A properly executed draft is a negotiable
instrument. Drafts are generally referred to as bills of exchange outside the United States. A time draft that has
been accepted by the drawee is called a trade acceptance.
The documents accompanying the draft are those required by customs authorities in both countries and those
stipulated by the importer. Failure to provide proper documentation could place the shipment in serious jeopardy.
A bill of lading is the title document for the goods shipped. In most cases, a negotiable bill of lading is used and
title is transferred by a simple endorsement. In the case of air shipments, the bills of lading are non-negotiable. To
prevent the importer from obtaining possession of the merchandise without paying or accepting a time draft, the
exporter may consign the shipment to the collecting bank, provided that the bank gives advance approval. Another
alternative may be to consign the goods to an impartial agent. If either option is not possible, the documentary
collection device may not be advisable when a straight or non-negotiable bill of lading or air waybill is used.
While the seller or its bank may select the collecting bank, the transaction may be expedited by using the buyer’s
bank in that role. Typically, the seller’s instructions list the documents transmitted and state the conditions under
which they are to be given to the buyer; they set forth the channel through which proceeds are to be remitted and
establish responsibility for paying bank charges. If the seller has an office or local representative in the buyer’s
country, this should be indicated in addition to listing a contact to be made there in the event of any problems.
Collection fees
In addition to the protection provided by the retention of title by the exporter, documentary collections have other
advantages. The fees are usually lower than those charged for letters of credit, and the collecting bank’s assistance
expedites payment over that which would be obtained by open account. It should also be noted that foreign
collecting banks deduct their fees from the funds received before sending them back to the seller. Those charges in
some countries are surprisingly high. Sellers can learn what fees are involved by asking their banks. If the costs
cannot be absorbed, arrangements should be made during the sale to have the buyer pay all or part of the fees. If
the collection letter does not specify which party is to pay, the fees will be deducted from the collected amount.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
Collection Advantages/Disadvantages
Documentary collections are widely used to settle trade transactions. They are the primary terms of sale when a
long standing relationship exists between the buyer and seller and particularly when the buyer is an authorized
dealer or distributor for the seller. In practice, the most common disadvantage is the delay when local funds are
exchanged into dollars or other hard currencies desired by the sellers for sales to developing countries. Those
delays are most often the fault of the exchange control authorities, not the buyers.
Please note that when the goods being shipped are perishable or manufactured to a buyer’s unique specifications,
this settlement method may not be advisable.
I.C.C. rules
The International Chamber of Commerce Uniform Rules for Collections (URC 522) govern the rights and
responsibilities of the parties inmost countries. Courts in those countries that accept these rules will, for the most
part, apply them unless contradictory laws or a unique set of facts require otherwise. In a collection transaction, a
bank acts as an agent for the seller. It is bound by the seller’s instructions and acts at its own risk if it takes actions
not covered by the instructions.
The full text version of the URC 522 can be ordered at www.iccbooksusa.com.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
Cash Flow
Incoming Documentary Collections
exporter importer
exporter’s Bank
exporter Documents
(remitting Bank)
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
exporter importer
exporter’s Bank importer’s Bank
exporter Documents Documents
(remitting Bank) (collecting Bank)
Bank of america merrill lynch SolutionS for importerS
Cash Flow
Incoming Documentary Collections (Continued)
Chapter 06
Documentary Collection for Importers
Cash Flow
Incoming Documentary Collections (Continued)
importer’s Bank
exporter importer
(collecting Bank)
importer’s Bank exporter’s Bank
exporter
(collecting Bank) (remitting Bank)
Documents
exporter’s Bank importer’s Bank
exporter Documents
(remitting Bank) (collecting Bank)
importer’s Bank
Documents importer
(collecting Bank)
Bank of america merrill lynch SolutionS for importerS
092Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 07
Bankers’ Acceptances Under
Import Letters of Credit
092Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 07
Bankers’ Acceptances Under
Import Letters of Credit
Chapter 07
Bankers’ Acceptances Under Import Letters of Credit
A bankers’ acceptance is a draft (an order for payment) or bill of exchange, payable at a fixed or determinable future
date, which is drawn on and accepted by a banking institution in the course of financing domestic or international
trade. By accepting the draft, the bank assumes an unconditional promise to pay the amount of the draft to any
proper holder who presents the draft for payment at maturity. A customer on whose behalf a draft is accepted
is obligated to make payment to the bank on or before the maturity date of the draft. A banker’s acceptance is a
negotiable instrument that normally does not state an interest rate. Banker’s acceptances are bought and sold on
a discount basis (that is, for less than face value) by subtracting an interest charge from the face amount of the
acceptance. When a bank buys (discounts) a banker’s acceptance, it earns the difference between the purchase
price and the face amount that will be reimbursed at maturity by the client. After a bank has initially discounted
its acceptance, it may either hold the bill until maturity in its own portfolio as an investment, or rediscount with
another investor.
Appropriate types of business for bankers’ acceptance financing
Because of restrictions imposed by the Federal Reserve Act and related regulations, the majority of users of this
type of financing tend to be engaged in some aspect of domestic or international commerce. Nonetheless, there
remains a very broad segment of business types that can effectively use this vehicle when the financing relates to
the movement of goods or their storage under contract of sale. Acceptance financing may also be employed for other
purposes as well, but there are some additional limitations to its use. Financial institutions, including banks and
other types of lending institutions, that do not have the ability to create or market banker’s acceptances because of
laws, regulations, lack of expertise, size, location or lack of market recognition may also find this type of financing
to be useful by employing banks such as Bank of America that do have this capacity. The advantage of acceptance
financing is its fixed, predetermined cost.
Financing characteristics
Unlike conventional bank lending, which normally requires funding for the life of the loan, there is an active
secondary market for banker’s acceptances. This secondary market gives these negotiable instruments a high
degree of liquidity that permits a bank to sell or rediscount them rather than hold them in portfolio. The secondary
market consists principally of a number of dealers (most of whom are nationally known brokers or securities
dealers) who stand ready to buy acceptances from banks at a discounted rate primarily for resale to their
customers. Banks may also market acceptances directly to customers or others who seek high-quality, short-term,
liquid investments. Because of the marketability feature, it has been said that when a bank finances a customer
on an acceptance basis, it lends its name rather than its money. The holder or investor in acceptances has the
assurance of payment by both the accepting bank and other endorsers. For this reason banker’s acceptances are
marketed at very competitive rates.
Bank of america merrill lynch SolutionS for importerS
Chapter 07
Bankers’ Acceptances Under Import Letters of Credit
Structure and mechanics of transactions
Of interest to importers, banker’s acceptances are created through commercial letters of credit by requiring that
drafts be drawn to mature at a specific future date rather than at sight. If the documents accompanying the
time draft are found to be in order, the time draft is accepted by the drawee bank, thereby creating a banker’s
acceptance. If the beneficiary desires payment before maturity of the draft, the bank may discount the draft and pay
the beneficiary. Banker’s acceptances are also generated independent of commercial letters of credit. A banker’s
acceptance is actually created when a bank formally acknowledges its obligation to honor a time draft drawn on
itself by stamping word “Accepted” across the draft, dating and officially signing the notation.
Parties to the draft
There are three main parties involved in the execution of a draft:
01. The Drawer: The seller or exporter who draws the draft.
02. The Drawee: The person or entity to whom the draft is addressed. This will be a bank under a letter of credit
transaction.
03. The Payee: The specific person/company to whom payment is directed.
Tenor
Time (usance) drafts for acceptance must indicate payment at a fixed or a determinable future period in time.
This is called the tenor of a draft. An example of a fixed future time is a draft drawn on October 1, 2007, specifying
payment on November 1, 2007.Most time drafts, however, specify payment on a determinable future time. Various
determination type tenors are:
• Thirty days sight (30 d/s)—this means the determined payment date would be 30 days after the inscribed date
of acceptance on the draft.
• Thirty days date (30 d/d)—the determined payment date under this method would be 30 days after the date of
the draft.
• Thirty days after bill of lading date—this denotes that the draft is payable 30 days after the “on board” date
if a marine bill of lading, or 30 days after the reception date by the carrier in the case of truck, railroad or air
shipments. (See UCP 600, Articles 19 through 27).However, this type of tenor is not determinable unless the
draft also shows on its face the bill of lading date or date of receipt by the carrier. If the draft were being drawn
under a letter of credit, the preferred method would be to have the creation date of the draft the same as the
“on board” bill of lading date or receipt date.
Note: the above examples show 30 as the number of days for projection. This number can vary as necessary,
such as 45, 60, 90, 120, 150 or 180. Acceptance financing is usually short term, up to six months or 180 days.
Draft tenors must always be fixed maturities or capable of being projected to a definite maturity. A draft tenor can
never be ambiguous or based on a contingency. Examples of inappropriate tenors are: thirty days after ship arrives,
sixty days after merchandise is accepted, or forty-five days from delivery.
Bank of america merrill lynch SolutionS for importerS
Chapter 07
Bankers’ Acceptances Under Import Letters of Credit
Advances
The creation of a banker’s acceptance does not itself generate a flow of cash since it is simply a promise to pay
the acceptance at maturity. To initiate the flow of funds, the bill must be discounted. Customarily, such discount
is made by the bank by deducting a fee (interest) from its face value for the period from the date of discount until
maturity. Inmost instances, the initial discount is performed by the accepting bank, usually at a rate related to
going market rates.
The total cost to the beneficiary consists of the fee assessed by the bank for accepting the draft and the discount.
Often, both elements are combined in an “all-in” or all-inclusive quotation to the customer. Under a letter of credit,
acceptance fees and discount costs may be either for the account of the beneficiary (normal) or the applicant.
If discount charges are payable by the applicant, discount of the acceptance is virtually automatic since the
beneficiary will receive the face amount of the acceptance as proceeds.
Repayment
The accepting bank is obliged to honor at maturity the acceptance it created, so it looks to its customer for
reimbursement. By paying the holder (purchaser) of the draft upon presentation at maturity, the bank extinguishes
its obligation.
Bank of america merrill lynch SolutionS for importerS
Chapter 07
Bankers’ Acceptances Under Import Letters of Credit
Bankers’ Acceptance Cash Flow
Flow of funds at time BA created
01
assumption: acceptance commission
Exporter draws $500,000 draft on Bank of America
at 1.5% per annum, 90 days to maturity.
02
Bank of America accepts the draft
03
assumption: discount at
Bank of America deducts acceptance commissions of $1,875 and $7500 for discount charges
illustration rate of 6%
04
05
Bank of America advances $490,625
At maturity, borrower repays Bank of America $500,000
Bank of america merrill lynch SolutionS for importerS
097Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 08
Obtaining Your Merchandise
097Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 08
Obtaining Your Merchandise
Chapter 08
Obtaining Your Merchandise
The issuing bank will send the documents presented under your letter of credit either directly to you, or to your
customs broker, after proper examination has been completed. Your customs broker will then use the documents to
clear the goods through customs.
The customs broker will advise you of charges for duty, ocean freight, insurance or entry fees. These charges
must be paid to the customs broker immediately as failure to do so may result in penalties from U.S. Customs. In
addition, you should keep the following in mind:
• No pier pickup can be made until all duty and ocean freight have been paid
• All figures should be verified against those given by the seller
• If any of the charges appear to be out of line, advise the seller immediately
• Duty should not be paid on items that are not dutiable
• Wharfage charges must be paid at the pier
• If goods travel as loose cargo, a loading charge must be paid
• Wharfage charges and loading charges are nominal and vary from port to port.
Full container loads are normally available for pickup within two days after arrival, and loose cargo is typically
ready for pickup three or four days after docking. Either you or your customs broker can check on cargo availability
after arrival. Some steamship companies require an appointment to pick up merchandise. If your goods require
further transportation, you must provide your trucker with a delivery order on your company’s letterhead for him to
take possession of your merchandise. All the information needed for this delivery order will be contained in your bill
of lading.
What happens if the goods arrive before the documents? Much depends on the type of transport document used.
Shipments made under an “order” bill of lading will normally not be released by the carrier without a properly
endorsed original bill of lading. However, Bank of America may be able to help you avoid costly delays and
demurrage charges by issuing a Steamship Guarantee or Air Release to the carrier.
A good customs broker is frequently the key to successful importing and should be contacted before finalizing any
contracts. Customs brokers can provide you with current information on:
• All documents needed from the seller—both regular and special—in order to have your goods clear customs.
• Import duties that may be assessed on your goods.
• Any quota that limits the quantity of a specific item for import.
Some of the other ways in which your customs broker can assist you include:
• Most shipments require formal customs entry and the posting of a bond. A customs broker can assist you in
both areas.
• Goods in transit should be insured by either the buyer or seller. If you do not have a policy, and insurance is not
provided by the seller, your customs agent can obtain the necessary coverage.
Bank of america merrill lynch SolutionS for importerS
099Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 09
Incoterms—International
Shipping /Trade Terms
099Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 09
Incoterms—International
Shipping /Trade Terms
Chapter 09
Incoterms—International Shipping/Trade Terms
What are Incoterms?
When buying or selling in international markets, it is critical that all parties to the transaction know and
understand the terms of sale. For example, a seller may think that he has quoted a price to a buyer exclusive of the
freight costs.
If the buyer thought that the price included the freight charges then a costly misunderstanding has occurred. For
this reason the International Chamber of Commerce has developed a set of trade terms that are used worldwide.
They come under the general heading of Incoterms. Some of the more frequently used terms are outlined below.
Incoterms were revised in January 2000.
The following is a summary of the highlights of the Incoterms, which is not intended to furnish Incoterms in
their entirety. For a more complete understanding please refer to the Guide to Incoterms 2000 published by ICC
Publishing Co. in New York, which can be ordered through ICC’sWeb site at www.iccbooksusa.com.
EXW (ExWorks . . . named place)
Ex Works means that the seller fulfills his obligation to deliver when he has made the goods available at his
premises (i.e., works, factory, warehouse, etc.) to the buyer. In particular, he is not responsible for loading the goods
on the vehicle provided by the buyer or for clearing the goods for export, unless otherwise agreed. This term thus
represents the minimum obligation for the seller, and the buyer has to bear all costs and risks involved in taking
the goods from the seller’s premises. If the parties wish the seller to be responsible for the loading of the goods on
departure and its risks and costs, this should be made clear by adding explicit wording to this effect to the contract
of sale. This term should not be used when the buyer cannot carry out the export formalities directly or indirectly. In
such circumstances, the FCA term should be used, provided the seller agrees that he will load at his cost and risk.
FCA (Free Carrier . . . at the Named Point)
This term has been designed to meet the requirements of modern transport, particularly such multimodal transport
as container or roll on-roll off traffic trailers and ferries. It is based on the same main principle as FOB except that
sellers fulfill their obligations when they deliver the goods into the custody of the carrier at the named point. If no
precise point can be mentioned at the time of the contract of sale, the parties should refer to the place or range
where the carriers should take the goods into their charge. The risk of loss or damage to the goods is transferred
from seller to buyer at that time and not at the ship’s rail. A “Received for Shipment” bill of lading is acceptable in
lieu of an “On Board” bill of lading. This allows exporters to receive shipping documents more quickly and to get
paid in a more timely manner. “Carrier” means any person by whom or in whose name a contract of carriage by
road, rail, air, sea or a combination of modes has been made. When the seller has to furnish a bill of lading, waybill
or carrier’s receipt, he/she duly fulfills this obligation by presenting such a document issued by a person so defined.
Bank of america merrill lynch SolutionS for importerS
Chapter 09
Incoterms—International Shipping/Trade Terms
FAS (Free Along Side . . . named port of shipment)
This means that the sellers fulfill their obligation to deliver when the goods have been placed alongside the vessel
on the dock or quay at the named port of shipment. The buyer has to bear all costs and risks of loss or damage to
the goods from that moment. The FAS term requires the seller to clear the goods for export.
FOB (Free on Board . . . named port of shipment)
FOB means “Free on Board.” The goods are placed on board a ship by the seller at a port of shipment named in the
sales contract. The risk of loss of or damage to the goods is transferred from the seller to the buyer when the goods
pass the ship’s rail. All costs from that point forward, including freight and insurance, are for the buyer’s account.
This term can be used only for sea or inland waterway transport. If the parties do not intend to deliver the goods
across the ship’s rail, the FCA term should be used.
CFR (Cost and Freight . . . named point of destination)
CFR means “Cost and Freight.” The seller must pay the costs and freight necessary to bring the goods to the named
destination, but the risk of loss or damage to the goods, as well as any cost increases, is transferred from the seller
to the buyer when the goods pass the ship’s rail in the port of shipment. The CFR term requires the seller to clear
the goods for export. This term should only be used for sea and inland waterway transportation. If the parties do
not intend to deliver the goods across the ship’s rail, the CPT term should be used.
CIF (Cost, Insurance and Freight . . . named port of destination)
CIF means “Cost, Insurance and Freight.” This means that the seller delivers when the goods pass the ship’s rail
in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port
of destination, but the risk of loss or damage, as well as additional costs due to events occurring after the time of
delivery, are transferred from the seller to the buyer. In CIF the seller also has to procure marine insurance against
the buyer’s risk of loss or damage to the goods during the carriage. Consequently, the seller contracts for insurance
and pays the premium. The buyer should note that under the CIF term the seller is required to obtain insurance
only on minimum cover. The CIF term requires the seller to clear the goods for export. This term should be used
only for sea and inland waterway transport. If the parties do not intend to deliver the merchandise across the ship’s
rail, the CIP term should be used.
CPT (Carriage Paid To . . . named place of destination)
This term means that the seller delivers the goods to the carrier nominated by him, but the seller must also pay the
cost of carriage to bring the goods to the named destination. Like CFR, “Freight or Carriage Paid To,” the buyer
bears all risks and any other costs occurring after the goods have been so delivered. “Carrier” is defined as any
person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail,
road, air, sea, inland waterway or by a combination of methods. If subsequent carriers are used for the carriage
to the agreed destination, the risk passes when the goods have been delivered to the first carrier. This CPT term
requires the seller to clear the goods for export.
Bank of america merrill lynch SolutionS for importerS
Chapter 09
Incoterms—International Shipping/Trade Terms
CIP (Carriage and Insurance Paid To . . . named place of destination)
This term is the same as “Freight or Carriage Paid To . . .” but with the addition that the seller has to procure
transport insurance against the risk of loss or damage to the goods during the carriage. The seller contracts with
the insurer and pays the insurance premium. CIF is used for goods carried by sea, while CIP is used irrespective of
the mode of transport. This term allows the exporter the greatest control over all aspects of shipment.
DAF (Delivered at Frontier . . . named place)
This term is used typically when goods are being moved overland, and delivery of the goods will take place at the
frontier of an adjoining country. It means that the seller delivers when the goods are placed at the disposal of the
buyer on the arriving means of transport (not unloaded), cleared for export, but not cleared for import at the named
point and place at the frontier (before the customs border of the adjoining country). The frontier must be clearly
named. For example, goods being shipped from the U.S. to Mexico might have Laredo, Texas, named as the frontier.
The shipper has the responsibility of delivering the goods to Laredo, while the buyer has the responsibility to bring
the goods across the border into Mexico and clear Mexican customs. This term may be used irrespective of the
mode of transport when goods are to be delivered at a land frontier. When delivery is to take place in the port of
destination, on board a vessel or on the wharf, the DES or DEQ terms should be used.
DES (Delivered Ex-Ship . . . named port of destination)
This term means that the seller delivers when the goods are placed at the disposal of the buyer on board the ship
but not cleared for import at the named port of destination. The seller must bear all the costs and risks involved in
bringing the goods to the named port of destination before discharging. This term can be used only when the goods
are to be delivered by sea or inland waterway or multimodal transport on a vessel in the port of destination. If the
parties wish the seller to bear the costs and risks of discharging the goods, then the DEQ terms should be used.
DEQ (Delivered Ex Quay . . . named port of destination)
This term means that the seller delivers when the goods are placed at the disposal of the buyer but not cleared for
import on the quay at the named port of destination. The seller bears costs and risks involved in bringing the goods
to the named port of destination and discharging the goods on the quay. The DEQ term requires the buyer to clear
the goods for import and to pay for all formalities, duties, taxes and other charges upon import. This term can be
used only when the goods are to be delivered by sea or inland waterway or multimodal transport on discharging
from a vessel onto the quay at the port of destination. If the parties wish to include in the seller’s obligations the
risks and costs of the handling of the goods from the quay to another place (warehouse, terminal, transport station)
in or outside the port, the DDU or DDP terms should be used.
Bank of america merrill lynch SolutionS for importerS
Chapter 09
Incoterms—International Shipping/Trade Terms
DDU (Delivered Duty Unpaid. . . named place of destination)
This term means that the seller delivers the goods to the buyer (not cleared for import) but not unloaded from any
arriving means of transport at the named place of destination. The seller has to bear the full cost and risk involved
in bringing the goods thereto other than, where applicable, any “duty” (which includes the responsibility for and
the risks of the carrying out of customs formalities and payment of formalities, customs duties, taxes and other
charges) for import in the country of destination. Such “duty” has to be borne by the buyers as well as any costs and
risks caused by their failure to clear the goods for import in time. This term may be used irrespective of the mode
of transportation, but when delivery is to take place in the port of destination on board the vessel or on the quay, the
DES or DEQ terms should be used.
DDP (Delivered Duty Paid. . . named place of destination).
This term means that the seller delivers the goods to the buyer (cleared for import) but not unloaded from any
arriving means of transport at the named place of destination. The seller must bear all costs and risks involved in
bringing the goods thereto including, where applicable, any “duty” (which includes the responsibility for and the
risk of carrying out of customs formalities, customs duties, taxes and other charges) for import in the country of
destination. While the EXW term signifies the seller’s minimum obligation, the DDP term represents the maximum
obligation. If the parties wish the buyer to bear all risks and costs of the import, the DDU term must be used. The
DDP term may be used irrespective of the mode of transport; when delivery is to take place in the port of destination
on board the vessel or on the quay, the DES or DEQ terms should be used.
Bank of america merrill lynch SolutionS for importerS
Chapter 09
Incoterms—International Shipping/Trade Terms
Incoterms Summary of Sellers/Buyer’s Responsibilities
Terms
Seller
Obligated to
Deliver Terms
Goods At…
Pre-shipment
Costs Paid
By…
Freight
Costs
Arranged
By…
Insurance
Document
arranged
By…
Delivery
Receipt for
Goods (if
required)
Obtain
Transport
Document
Unload
Costs
EXW—Ex works
(...named place)
seller’s
premises
seller buyer buyer buyer buyer buyer
FCA—Free carrier
(...named place)
location
designated by
buyer
seller up
until goods
delivered to
carrier/agent
buyer buyer seller seller buyer
FAS—free
alongside ship
(...named port of
shipment)
alongside the
vessel
seller up
until goods
delivered to
carrier/agent
buyer buyer seller buyer buyer
FOS—free on
board (...named
port of shipment)
on board the
vessel
seller buyer buyer seller seller buyer
CFR—coast
and freight
(...named port
of destination)
on board the
vessel
seller seller buyer seller seller seller
CIF—cost,
insurance
and freight
(...named port
of destination)
on board the
vessel
seller seller seller seller seller seller
CPT—carriage paid
to (...named place
of destination)
to the carrier seller seller buyer seller seller seller
CIP—carriage &
insurance paid to
(...named place of
destination)
to the carrier seller seller seller seller seller seller
DAF—delivered at
frontier (...named
place)
seller’s
frontier
seller seller up
to the
frontier
buyer seller buyer (at
frontier)
buyer
DES—delivered ex
ship (...named port
of destination)
destination
port while still
on board
seller seller buyer seller seller buyer
DEQ—delivered
ex quay
(...named place of
destination)
the
destination
seller port
quay
seller seller buyer seller seller seller
(including
duty)
DDU—delivered
duty unpaid
(...named place of
destination)
disposal of
buyer, named
place
seller seller buyer seller seller seller
(excluding
duty)
DDP—delivered
duty paid
(...named place of
destination)
an inland
designation
designated by
buyer
seller seller buyer seller seller seller
(including
duty)
Bank of america merrill lynch SolutionS for importerS
0105Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 10
Standby Letters of Credit
and Special Purpose Letters of Credit
0105Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 10
Standby Letters of Credit
and Special Purpose Letters of Credit
Chapter 10
Standby Letters of Credit and Special Purpose Letters of Credit
Standby Letters of Credit
A standby letter of credit is an assurance of the performance of the client (applicant) to a beneficiary. Bank of
America issues standby letters of credit for its clients (individuals, corporations or correspondent banks).
The standby letter of credit substitutes the credit standing of Bank of America for that of our client. Generally,
standby letters of credit are payable against the presentation of a draft and a statement from the beneficiary
stating that our client, the applicant of the standby letter of credit, has defaulted under the terms of a specific
underlying agreement.
The standby letter of credit is an extremely flexible instrument and can be tailored to fit many situations.
The following are examples of typical uses for standby letters of credit:
• Bid and performance bonds or guarantees
• To ensure the repayment of principal and/or interest on loans, bonds, or commercial paper
• Assurance of timely invoice payment
• Substitute for a cash security deposit.
Applicants should be cautious when a standby letter of credit is requested. Since most of these letters of credit
require only statements or declarations prepared by the beneficiary, they can be drawn on arbitrarily. The
beneficiary should therefore be of unquestionable character and have an established relationship with the applicant.
Standby letters of credit are governed by the International Standby Practices, International Chamber of Commerce
Publication 590 (ISP98), when incorporated by reference in the standby letter of credit. The ISP98 reflects generally
accepted practice, custom, and usage of standby letters of credit.
The formulation of standby letter of credit practices in separate rules evidences the maturity and importance of this
financial product. The outstanding amounts of standby letters of credit greatly exceed the outstanding amounts
of commercial letters of credit. While the standby letter of credit is associated with the United States, where it
originated and where it is most widely used, it is truly an international product. Non-U.S. bank outstandings have
exceeded those of U.S. banks in the United States for the past several years. The full text version of the ISP98 is
available from the International Chamber of Commerce at www.iccbooksusa.com.
Bank of america merrill lynch SolutionS for importerS
Chapter 10
Standby Letters of Credit and Special Purpose Letters of Credit
Bank of America provides...
Feature Advantages Benefits
Cash Flow Financial strength of Bank of America Frees customer funds that would otherwise have been
tied up separately as deposits.
Expertise Staff of professionals have years of experience in the Assures that the standby letter of credit is issued in a
technical handling of standby letters of credit. manner that best protects client interest.
Foreign Exchange Bank of America can issue a standby letter of credit in Achieves compliance with contracts requiring foreign
currencies other than U.S. dollars. currency payments.
Credit Assurance Bank of America can issue a standby letter of credit on Provides access to foreign loans that would otherwise
behalf of a client to serve as a n assurance to a bank not be available to client.
overseas for the repayment of loans made by the bank
to our client or its subsidiary or affiliate.
A “Standby Letter of Credit Application Kit,” which includes additional information and guidance on completing a
standby letter of credit application, is available through your local Global Trade & Supply Chain Solutions Officer.
Bank of america merrill lynch SolutionS for importerS
Chapter 10
Standby Letters of Credit and Special Purpose Letters of Credit
A typical standby letter of credit, as issued, is shown here:
PLACEAND
DIATE
OF
ISSUE
IRREVOCABLE
STANDBY
LOSANGELES,
CA
JUNE
29,
2007
LETTER
OF
CREDITNO.
XXXXXXX
APPLICANT
DATEAND
PLACE
OF
EXPIRY
(APPLICANT
NAME)
DECEMBER
31,
2010
IN
SAN
FRANCISCO,
CA
35
MAIN
STREET
SAN
FRANCISCO,
CA94116
BENEFICIARY
(BENEFICIARYNAME)
ADVISING
BANK
GPO
BOX
444
BANK
OFAMERICA
HONG
KONG
HONG
KONG
AMOUNT:
U.S.$3,500,000.00
(THREE
MILLION
FIVE
HUNDREDTHOUSAND
U.S.
DOLLARS)
WE
HEREBYISSUEINYOUR
FAVORTHIS
IRREVOCABLE
STANDBYLETTER
OF
CREDITNO.
XXXXXXXWHICH
IS
AVAILABLE
BYPAYMENTWITH
OURSELVESAGAINSTPRESENTATIONOFYOUR
DRAFTATSIGHTDRAWN
ON
BANK
OFAMERICA,
LOSANGELES
CALIFORNIA,
BEARINGTHE
CLAUSE:
“DRAWN
UNDER
STANDBYLETTER
OFCREDIT
NUMBERXXXXXXXOF
BANKOFAMERICA,LOSANGELES,CA”ACCOMPANIED
BYTHEFOLLOWING
DOCUMENTS.
BENEFICIARYSIGNED
STATEMENTCERTIFYINGTHAT(APPLICANTNAME)HAS
FAILEDTO
COMPLYWITHTHE
TERMSAND
CONDITIONS
OF
CONTRACTNO.
KFX-KAF-02005.
IT
ISACONDITION
OF
THIS
LETTER
THAT
IT
WILL
BEAUTOMATICALLY
EXTENDED
WITHOUT
AMENDMENTFORADDITIONALPERIODS
OF
ONEYEARFROMTHECURRENTORANYFUTURE
EXPIRATIONDATE
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Bank of america merrill lynch SolutionS for importerS
Chapter 10
Standby Letters of Credit and Special Purpose Letters of Credit
Special Purpose Letters of Credit
Revolving letters of credit
A revolving letter of credit is one which, under the terms and conditions thereof, the amount is renewed or
reinstated without specific amendment to the letter of credit.
A revolving letter of credit:
• Can be revocable or irrevocable
• Can revolve in relation to time or value
In the case of a letter of credit that revolves in relation to time, which is available for up to $15,000.00 per month
during a fixed period of time such as six months, the credit is automatically available for $15,000.00 each month
whether or not any sum was drawn during the previous month. A letter of credit of this nature can be cumulative or
non-cumulative. If the letter of credit is stated to be cumulative, any sum not utilized during the first period carries
over and may be utilized during subsequent periods. If the letter of credit is non-cumulative, any sum not utilized in
a period ceases to be available (not carried over to a subsequent period).
In the case of a letter of credit that revolves in relation to value, the amount of the letter of credit is reinstated
upon utilization, with a given overall period of validity. The letter of credit may provide for automatic reinstatement
immediately upon presentation of the specified documents only after receipt by the issuing bank of those
documents. To give a degree of control it is necessary to specify the maximum total amount that may be drawn
under the letter of credit. Such amount would have to be decided by the buyer and seller to meet their requirements
and agreed to by the issuing bank. A letter of credit for the full value of goods to be shipped by requiring specific
quantities to be shipped weekly or monthly, and allowing partial shipments, is not a revolving credit. It is a letter of
credit available by installments as defined in the UCP 600 Article 32. In this type of letter of credit it is important to
note than any missed installment makes the letter of credit unavailable for further drawings.
Transferable letters of credit
A transferable letter of credit is one that can be transferred by the original (first) beneficiary in whole or in part,
to one or more other parties (second beneficiaries) (ISP98 Rule 6 orUCP 600 Article 38,). It is normally used when
the first beneficiary does not supply the merchandise but is a broker and thus wishes to transfer part, or all, of the
rights and obligations to the actual supplier(s) as second beneficiary(ies). This type of letter of credit can only be
transferred once (any second beneficiary cannot transfer to a third beneficiary).
Bank of america merrill lynch SolutionS for importerS
Chapter 10
Standby Letters of Credit and Special Purpose Letters of Credit
The transfer must be effected in accordance with the terms of the original letter of credit, subject to the following
exceptions:
01. The name and address of the first beneficiary may be substituted for that of the applicant of the letter of
credit.
02. The amount of the letter of credit and any unit price may be reduced; this would enable the first beneficiary
to draw against the letter of credit for commission or profit.
03. The expiration date of the credit, the period of time after date of issuance of the transport document for
presentation of documents, and the shipment period may be shortened.
04. The percentage for which insurance coverage must be effected may be increased in such a way as to provide
the amount of cover stipulated in the original letter of credit.
It should be noted that a letter of credit would only be issued as “transferable” on the specific instructions of the
applicant. This would mean that both the letter of credit application form and the letter of credit itself must clearly
show that the credit is to be made transferable (only an irrevocable letter of credit would be issued in this form).
The transfer is effected by the bank authorized in the letter of credit as the transferring bank at the request of the
first beneficiary.
In practice, the first beneficiary is allowed to substitute any invoices and any drafts for those presented to the
transferring bank by the second beneficiary. The bank must correlate and check both invoices and drafts with the
other documents called for and ensure that all documents comply with the terms of the original letter of credit.
Bank of america merrill lynch SolutionS for importerS
0111Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management
and Foreign Exchange Services
0111Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management
and Foreign Exchange Services
Chapter 11
International Cash Management and Foreign Exchange Services
International Treasury Management Services
Bank of America Treasury Management Services help you manage your cash position and cash flow. We
build comprehensive, customized solutions to meet the unique needs of our clients, improve their financial
competitiveness, and make their treasury functions more efficient.
By working with you, we help you streamline the way you make payments, collect your receipts, and reconcile your
accounts worldwide. With our broad treasury management suite of services, we guide you through the steps to
make your treasury functions more efficient.
Bank of America Treasury Management services can:
• Reduce your administrative costs and help you analyze and forecast your financial needs
• Help you concentrate on managing your working capital and other strategic financial objectives, including
maximizing company investments
• Increase cash for investment, capital expenditures, and other purposes by helping you predict your day-to-day
cash needs
• Free up resources by providing you with fast and accurate information.
Payments
Bank of America offers you quick, efficient payment services that can streamline the way you remit to your vendors,
clients and employees and reconcile your accounts. We can provide a customized solution, integrating the following
components:
• Account Reconciliation—reconcile your accounts quickly, easily and accurately
• Automated ClearingHouse (ACH)—save time and money by moving funds electronically, from your own
personal computer
• Electronic Data Interchange (EDI)—increase your efficiencies through the electronic transfer of business data
with your business partners
• Information Reporting—receive timely account information at your desktop
• Wire Transfer Service—securely and efficiently send or receive same-day funds.
Receipts
We can help you quickly turn your receipts into cash while reducing information float and improving credit
management. If you are challenged to provide your clients with payment flexibility or to improve efficiencies in your
receipt processing, we can help you manage your receivables by developing customized solutions from the following
range of services:
• Account Reconciliation—fast and economical method to help you manage your deposit activity by outsourcing
all or part of your monthly checking account reconciliation functions
• Automated ClearingHouse (ACH)—save time and money by moving funds electronically
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management and Foreign Exchange Services
• Electronic Data Interchange (EDI)—increase your efficiencies through the electronic transfer of business data
with your business partners
• Information Reporting—receive timely account information at your personal computer
• Lockbox—utilize our network of post office boxes to accelerate the collection of client remittances, improving
control of your receipts in selected countries
Treasury
Bank of America Treasury Services give you the information and services required to help you get the most out of
your deposits and balances.
• SWEEP—automate the concentration of your daily excess collected balances
• Zero Balance Accounts—gain greater control of your funds by automatically transferring them between master
and subsidiary accounts on a same-day basis
• Euro Cross-Border Automated Zero Balance—concentrate your Euro currencies
• Online capabilities
• Current-day reporting
• Prior-day reporting
• ACH initiation
• Wire transfer initiation
• International U.S. dollar wires
• FX international wires.
Working Capital Management
Treasury Management has typically been charged with studying and documenting the cycles of receipts and
payments to improve return on investment portfolios and/or to reduce debt. The credit management function
involves managing raw materials, work in process, inventory and the distribution of finished goods. These are all
components of the cash flow cycle and very closely tied to one another. If one component fails or is delayed, the next
activity and all subsequent activities will suffer.
Investment/Paydown
Equity/Debt
Payables Raw Materials
Work in Progress
Receipts Inventory
Sales of goods
Distribution
Your Bank of America Treasury Management team is prepared to work with you to identify issues and discover
opportunities and solutions.
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management and Foreign Exchange Services
Client financial architecture
The focus of your Corporate Treasury staff has expanded to include overseeing the complete transaction process—
receipts, payments and treasury.
Bank of America Treasury Management officers will ask questions to gain an understanding of your core processes
so they can more easily develop and implement solutions that add value to your internal operations.
• Your Bank of America Treasury Management team will work with you to learn and understand your issues and
needs to uncover opportunities not easily recognized.
• Working as advisors, we will deliver innovative solutions, drawing from our comprehensive U.S. and
international payments, receipts, treasury and global trade capabilities to help you meet your business
objectives.
• As the #1 provider of treasury management services to middle market and large corporate clients in the United
States, we provide exceptional customer service and ongoing technological advancements.
• The Global Banking System (GBS), the backbone of Bank of America’s international banking operations, links
accounts and services through one single platform.
Risk
Receipts
Credit
Invoice
Receipts
Cash Application
Deductions Mgmt
Disputes
Collections/Loss Control
Research/Inquiries
Treasury
Cash Position
Bank Relations
Miscellaneous
Payments
Purchasing
Request for Payment
Payment Origination
Settlement
Fraud Control
Reconcilenment
Research/Inquiries
Information
Client Access Technology Strategy Information Security
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management and Foreign Exchange Services
Foreign Exchange Services
Bank of America Foreign Exchange Services Group provides the following products and services:
Worldwide trading
• Nearly thirty sales and trading centers
• Short-and long-dated forwards in all non-exotic currencies
• Non-deliverable forwards pricing in selected exotic currencies
• Standard and exotic options.
Risk analysis
• Quantitative analysis of FX exposures and hedging strategies
• Analysis and review of the risk management process
• Development of new hedging approaches and products
• Currency research and risk management monographs
Currency strategy
• Economists located on trading floors, who are responsive to market developments
• Globalmacro-economic coverage of all markets through worldwide network
• Regular publication of market research and country analysis available electronically in real-time
Other services
• Extensive series of workshops and seminars
• Full-featured capital markets Web site with instant access to research, market commentary, and risk analysis
tools
E-Solutions
Bank of America’s Global Markets Web site provides clients with valuable ideas, analyses and tools required to
manage their physical assets, liabilities and risks.
The resources available through the site include:
• Research: Market commentary, economic analysis, technical analysis, forecasts and research on practical
investment and risk management issues, such as setting foreign exchange budget rates, estimating
international costs of capital and evaluating hedging strategies
• News & information: Economic calendar hyperlinked to Bank of America research and online futures and
margin statements
• Analysis tools: TradeCalc (Options pricer), Chart Room (historical data), Portfolio Optimizer, Implied Volatility
and Daily FX rates
• Trading: FX02, an FX e-dealing service that offers spot, forward and swap transactions, online trade blotters,
confirmations and valuation reporting
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management and Foreign Exchange Services
PaymentsDirect FXWires andDrafts
Your business is increasingly global. Your operations are expanding internationally. Employees and suppliers
extend across borders. As your company changes and grows, you need the ability to make multi-currency payments
quickly, easily and cost-effectively. Bank of America FX Wires and Drafts allow you to tap the power of the internet
to manage foreign currency payments effectively.
Integrated FX platform
The Bank of America Direct® FX Wires and Drafts service allows you to issue payments—in more than 100
currencies—using the Web browser on your PC desktop.
The service makes it easy for you to make payments of up to $5 million (U.S. dollar equivalent) to suppliers,
overseas employees, international operating units, or any other beneficiary, via our state-of-the-art Web-browserbased
system.
Payment settlement is made via deductions from your Bank of America account. Since competitive foreign exchange
rates are critical, our system provides the most current rates, which are continuously updated throughout each
business day.
Benefits of FX Wires and Drafts Service
The FX Wires and Drafts Service delivers the following significant benefits:
• Intuitive pull-down menus and clear data input screens make it easy for you to complete a transaction in
minutes.
• The service is available 24 hours a day—allowing you to set up payments and review transactions on a
schedule that’s convenient for you.
• With on-site draft printing, you can print your foreign currency drafts locally and immediately.
• The service gives you robust security, using digital certificates and flexible user controls.
• You have the benefit of real-time, competitive FX rates from one of the leading FX trading operations in the
world.
• You have the added confidence that your payments are made with greater accuracy since the system
automatically provides certain standard payment information.
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management and Foreign Exchange Services
Seminars and Workshops
Foreign Exchange Workshop
• A three-day, case study-based workshop that introduces the attendees to such topics as: “Defining Foreign
Exchange Exposures,” “Settling Currency Risk Management Policies and Procedures,” “Foreign Currency
Options” and “Managing Foreign Currency Exposures”
• A one-day seminar specifically designed to cover the key aspects of the three-day seminar in a more condensed
version.
Currency Option Seminars
To complement Bank of America’s extensive capabilities in providing currency options to its clients, the Bank also
offers educational opportunities where clients can improve their understanding of option-related products and learn
to use them within an appropriate risk management framework.
Seminars include:
• Introduction to Vanilla Currency Options
• Introduction to Exotic Currency Options
• Hedging with Currency Options and the Accounting Implications
• Currency Option Risk Management
Managing risk for the MNC
This seminar is designed for the Treasury professional who desires a deeper understanding of the issues and
strategies that are necessary for managing risk for a multi-national corporation.
FAS 133
This comprehensive seminar will help Treasury and Accounting implement and maintain compliance with the new
derivatives and hedging rules. The seminar will focus specifically on new developments, including recent decisions
from the DIG and insight into future changes.
If you are interested in attending any of these seminars, please contact your Global Product Solutions officer.
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management and Foreign Exchange Services
Accounting Considerations
Accounting for Derivatives and Hedging Transactions—FAS 133 (as amended by FAS 138)
• Financial Accounting Standard No. 133 (as amended by FAS 138), effective for fiscal years starting after June
15, 2000, requires all derivatives to be shown on the balance sheet at fair value. Changes in fair value of the
hedge will go through earnings unless the transaction qualifies for special hedge accounting.
• Each operating unit determines whether it has an FX exposure based upon its functional currency. Companies
must document hedge strategies and the hedge must be highly effective to qualify for hedge accounting. Any
ineffective portion of the hedge may be charged to earnings immediately.
• Three types of hedges that qualify for special accounting are cash flow hedges, fair value hedges and net
investment hedges.
• A cash flow hedge protects against changes in the USD equivalent cash flows associated with an unrecognized
firm commitment, recognized assets or liabilities or a forecasted transaction.
• A fair value hedge protects against changes in fair value of an FX-denominated unrecognized firm
commitment, a recognized asset or liability or an available-for-sale security.
• A net investment hedge protects the USD equivalent net asset position of a foreign currency functional
subsidiary.
• Hedges of business combinations, inter-company dividends and anticipated exposures that are not probable do
not receive special hedge accounting.
Cash Flow Hedge Accounting
The fair value of the hedge is recorded on the balance sheet as an asset or liability and the effective portion of the
hedge is offset in equity (Other Comprehensive Income). The balance in equity is released to income as the hedged
item affects earnings (i.e., when forecasted transaction occurs or when sport/sport changes of balance sheet items
are recognized).
Fair Value Hedge Accounting
The fair value of the hedge is recorded on the balance sheet as an asset or liability with the offset in income. The
carrying value of the underlying hedged item is also adjusted with the offset in income as well.
Net Investment Hedge Accounting
The fair value of the hedge is recorded on the balance sheet as an asset or liability with the offset in the cumulative
translation account CTA (equity). The change in value of the foreign subsidiary net asset position is also adjusted to
CTA.
Please note that Bank of America Corporation is not an accounting advisor. Please consult with your auditors to
determine the appropriate accounting treatment for your company.
Bank of america merrill lynch SolutionS for importerS
0119Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 12
International Trade Glossary
0119Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 12
International Trade Glossary
Chapter 12
International Trade Glossary
acceptance. A time draft that the drawee (the payer) has accepted and acknowledged in writing the unconditional
obligation to pay it at maturity.
accepting Bank. A bank that is the drawee of a time draft and that becomes the acceptor of the draft.
account party. (See Applicant.)
advising Bank. A bank which receives a letter of credit issued by the applicant’s bank and forwards it to the
beneficiary without assuming any responsibility or liability other than to ensure their advice accurately reflects the
terms and conditions of the credit (and to verify the credit’s authenticity).
at xx days after date. A term used to indicate that the maturity date of a draft is determined by the date on which it
was drawn and is not determined by the date of acceptance by the drawee.
at xx day after sight. A term indicating that the maturity date of a draft is determined based on a specified number of
days after presentation of the draft to the drawee or payee.
air Waybill. A transport document/bill of lading which serves as a receipt for goods, (contract to transport the goods,
and which indicates to whom the goods are to be delivered). Generally, air carriers do not allow Air Waybills to be
issued in negotiable form. Air Waybills should not be consigned to order of a named party, but should be consigned
directly to a named party.
all risks coverage. The broadest type of standard marine insurance coverage; may show exclusions for damage
caused by war, terrorism, strikes, riots and civil commotion.
alongside. Place that is at the side of the vessel. Goods to be delivered alongside are to be delivered to the dock from
which they can be loaded aboard the ship.
applicant. The buyer/importer/account party who applies to its bank to issue a letter of credit in favor of the
beneficiary/seller/exporter.
at Sight. The tenor of a draft or availability term of a credit indicating that payment is due upon presentation or
demand.
aval. A time draft drawn by an exporter on the buyer under which the buyer’s bank has guaranteed that the draft
will be paid at maturity.
Banker’s acceptance. A time draft drawn on a bank, usually by an importer or exporter, which, once accepted by the
drawee bank, becomes an unconditional obligation of the bank to pay at maturity.
Beneficiary. The person or company in whose favor a letter of credit is issued. Usually the beneficiary is the seller/
exporter.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
Bill of exchange. (See Draft.)
Bill of lading. A transport document which serves as a receipt for goods, a contract to transport the goods, and
engagement to deliver the goods at the prescribed destination to the lawful holder of the bill of lading. While this
term is frequently used to describe an ocean/marine bill of lading, its legal definition is much broader. (See also, Air
Waybill, Ocean Bills of Lading, Inland Bills of Lading.)
Boycott. A refusal to deal commercially with a person, firm, or country.
carnet. A customs document that permits the holder to temporarily bring goods into a country (e.g. for a trade
show), and then take them back out without having to pay customs duties.
cash in advance. The payment by a buyer to a seller prior to the purchased goods having been shipped.
cash against Documents. (See Documents Against Payment.)
central Bank. A government-owned or controlled bank that oversees other banks in the nation, issues currency, and
serves as a depository for government funds.
Certificate of Analysis. A certificate issued regarding the quality and composition of food products or
pharmaceuticals.
Certificate of Inspection. A document certifying that merchandise was in good condition immediately prior to its
shipment.
Certificate of Origin. A document, often issued by a Chamber of Commerce, certifying the origin of the goods being
shipped. It is used to satisfy import regulations and to determine customs duties.
clean transport Document. A transport document that bears no clause or notation, indicating that goods were
received in apparent good order and were not damaged or had other irregularities.
clean Draft. A draft to which no shipping documents are attached.
commercial invoice. A document issued by a seller listing goods being sold to a named buyer, including the price and
shipping terms.
Confirmed Letter of Credit. An obligation assumed by one bank (the confirming bank) on behalf of the issuing bank, of
a letter of credit under which the confirming bank undertakes to honor or negotiate drafts and/or documents which
are presented in compliance with the credit’s terms and conditions.
consignee. The person or firm named in a freight contract to whom merchandise is to be delivered.
Documentation differentiates between an intermediate consignee and an ultimate consignee for export control
purposes.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
consular invoice. A commercial invoice that has been reviewed by the Consulate of the buyer’s country for the
purpose of verifying the value and quantity of the shipment and to ensure that no indigenous laws or regulations
are being broken.
container. A uniform-sized, sealed, reusable metal box in which goods are shipped by vessel, truck, rail or air.
Country Risk. The risks inherent in doing business in a foreign country over and above commercial risks, which are
generally beyond the local company’s ability to control.
credit risk insurance. Insurance purchased through either the Export-Import Bank of the United States, or private
sector companies, to provide protection against non-payment due to country or commercial risks.
customs. National government authorities that regulate the flow of goods to or from a country and collect duties
levied on imports and exports.
customhouse Broker. A private firm that arranges to clear goods through customs. Customhouse brokers also
commonly act as freight forwarders.
Demurrage. Additional storage charges incurred as a result of excessive delays in clearing cargo off a vessel, wharf,
freight car or air cargo facility.
Devaluation. The official lowering of a country’s currency in relation to one or more currencies of other countries. It
tends to make imports in that country more expensive, and to make exports more attractively priced to overseas
buyers.
Discharge. To unload cargo.
Dock Receipt. A receipt for goods issued by an ocean carrier or their agent at their dock or warehouse, but not
covering the loading on a vessel.
Documentary collection. The presentation through banking channels for payment or acceptance by a buyer of
documents relating to the shipment of goods.
Documents against acceptance (D/a). A documentary collection wherein shipping documents are released to buyers in
exchange for them obligating themselves to future payment via execution of a trade acceptance. (See also Aval.)
Documents against payment (D/p). A documentary collection wherein shipping documents are released to the buyer in
exchange for payment for the amount of the draft.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
Draft. An unconditional order in writing from drawer (exporter) to drawee (importer) directing the drawee to pay a
specific amount of money to the payee on demand or at a fixed or determinable future date. (See also, Sight Draft,
Time Draft.)
Drawee. The person, company or bank upon which a draft is drawn.
Drawer. The person, company or bank that creates the draft and generally is entitled to receive payment.
Durable Goods. Furniture, machinery, appliances and similar goods that are not processed or consumed by their
users.
Duty. A tax on imported goods imposed by the customs authorities in that country.
economic Sanctions. A foreign policy tool used to punish and/or influence a target nation. Sanctions can include
prohibiting trade, economic assistance, financial transactions or even all economic relations.
embargo. A restriction or prohibition on exports or imports with respect either to specific products or specific
countries.
exchange rate. The value or price of one currency when used in relation to its value in another currency, for example,
the number of units of currency A that is required to be exchanged for one unit of currency B.
exim-Bank. The U.S. Export-Import Bank. The U.S. Eximbank is an independent agency that finances the export of
U.S. goods and services through loans, guarantees, working capital guarantees and insurance.
exporter. The person or company that sells or arranges to transport goods out of a country.
export license. A government document used in some countries that allows the export of certain controlled products
to specific destinations.
export management company. A private firm that serves as the export department for a number of companies. The
firm typically do not take title to the goods and is paid on a commission basis.
export trading company. A firm that serves as the export department for a number of companies that takes title to
the goods. They make their money by making a profit margin on the goods being exported.
force majeure. Conditions such as floods, earthquakes, hurricanes or other events beyond the control of various
parties involved in transporting goods. Marine contracts typically exempt the affected parties from their
contractual obligations as a result of Force Majeure.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
foreign exchange. The currency of a foreign country and/or the conversion from one currency to another.
forward exchange. The setting of an agreed-upon exchange rate between a foreign exchange trader and a client
whereby the trader contracts with the client to buy/sell a specific amount in foreign currency at a future date at a
predetermined exchange rate. (See also, Spot Exchange.)
foul (not clean) Bill of lading. A receipt for goods issued by a carrier with an indication that the goods or the
packaging were in damaged condition when received.
free (foreign) trade Zone. An enclosed and secured area, usually designated by a port, into which goods may be taken
and customs duties may be deferred or waived until such time as the goods are removed for domestic distribution or
re-exported.
freight forwarder. A private company that arranges cargo space on a carrier, as well as the logistics for delivering
the goods to the carrier (e.g. ship, airplane etc.). They also frequently assist in the preparation of shipping
documents for presentation, either under a letter of credit or collection basis.
free of particular average (fpa). A clause used in marine insurance indicating that partial loss or damage to a
shipment is not covered. Loss resulting from conditions such as the ship sinking or burning may be exempted from
the clause. (See also, With Particular Average.)
Gatt. “General Agreement on Tariffs and Trade.” A multilateral treaty designed to reduce trade barriers, and to
provide a forum for resolution of trade disputes.
General export license. Authority to export without the need for a specific or validated export license.
Gross Weight. The full weight of a shipment, including goods, packaging and container.
import. To bring goods into a country whose origin is in another country. The importer is usually the buyer or the
buyer’s agent.
import license. A government document required in some countries for importing specific goods originating in
specific countries.
incoterms. International rules published by the International Chamber of Commerce for the interpretation of foreign
trade terms.
inland Bill of lading. A bill of lading used to cover the transport of goods within a country’s borders, such as by rail or
truck.
Insurance Policy/Certificate. A document that assures the consignee that the merchandise is insured to cover loss or
damage while in transit.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
international chamber of commerce (icc). An organization founded to promote free trade and private enterprise and
to represent business interests at the national and international level. The ICC is composed of national councils
from over 90 countries.
issuing Bank. The bank that issues a letter of credit; also called the opening bank.
Letter of Credit. A conditional undertaking by a bank on account of a buyer (applicant) of goods in favor of a seller
(beneficiary) under which payment is effected against presentation of stipulated documents in compliance with the
letter of credit’s terms and conditions.
marine risk insurance. Insurance covering loss or damage while goods are at sea. Typical coverage includes losses
sustained due to fire, shipwreck, piracy, strikes, riots or civil commotion, as well as the standard losses caused as a
result of the cargo being damaged.
marks. Letters, numbers or symbols used on packaging so as to identify the cargo.
Marks of Origin. Physical markings on a product indicating the country where the merchandise was produced.
mercoSur (mercado comun del Sur—Southern cone common market). A preferential trade agreement among countries
of the southern cone of South America that aims to establish free trade and increased economic cooperation among
members.
most-favored-nation treatment. A commitment that a country will extend to another country the lowest tariff rates
or the most favorable non-tariff policies it applies to any third country. All GATT contracting parties undertake to
apply such treatment to each other.
multimodal transport. The movement of freight using two or more different kinds of transport such as ocean and
truck, ocean and rail etc. (May also be called combined transport bill of lading, intermodal bill of lading or through
bill of lading)
nafta (north america free trade agreement). A regional preferential trade agreement that aims to eliminate tariffs
and other trade, services and investment barriers among its constituents.
naicS code. The North American Industry Classification System—the industry classification system used by the
statistical agencies of the United States
net Weight. Weight of the goods with any immediate wrappings.
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ocean Bill of lading. A document issued by a shipping line that serves as (a) a receipt for goods, (b) a contract to
transport goods, and (c) a means to transfer title from the shipper to a designated party. Most often, the carrier will
issue three original bills of lading. Ocean bills of lading may either be “negotiable” or “straight.” Under a negotiable
bill of lading, one original bill of lading must be surrendered to the shipping line in order for the consignee to
take delivery. The bill of lading is consigned to the order of a named consignee. Ownership in the goods may be
transferred through endorsement of the bill of lading. Under a straight bill of lading, the consignee may take
delivery by surrender of either an original or copy of the bill of lading or in some instances by simply proving their
identity. Straight bills of lading are consigned to a consignee with no possibility of transferring ownership through
endorsement.
open account. A selling arrangement whereby goods are shipped to a buyer prior to payment being made, and where
the seller’s risk is entirely with the buyer and the buyer’s country.
open insurance policy. A marine insurance policy that applies to all shipments over a period of time rather than on a
single shipment.
opening Bank. The bank that issues the letter of credit. Same as issuing bank.
opic. Overseas Private Insurance Corporation. AU.S. government agency that provides risk protection on capital
investments made in foreign countries.
packing list. A document that lists the various packages or cartons being shipped and their contents.
particular average. Partial loss or damage to goods.
Phytosanitary Certificate. A certificate typically issued by a country’s agricultural department to satisfy import
regulations in various countries certifying that specified perishable food, weed and plant items are free from
contamination, pests and plant diseases.
pro-forma invoice. A draft or sample of what the final invoice will look like. Used by sellers in the negotiating process
with potential buyers in order to ensure that all parties understand what costs are included in the quoted price.
purchasing agent. An agent who purchases goods on behalf of a foreign buyer.
Quota. A limitation placed by a government on the quantity of specific goods that may be imported or exported
without the imposition of additional customs duties.
rate of exchange. The value of one country’s currency in terms of another.
Shipper’s export Declaration (SeD). A U.S. Treasury form required to be completed for all shipments leaving the
United States. It indicates the value, nature of the goods, weight, destination, etc. It is not an export license. Very
few products leaving the United States require an export license.
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Shipping Weight. The gross weight of a shipment, including moisture content, wrappings, crates, boxes and
containers (other than cargo vans and similar substantial outer containers).
Sight Draft. A draft which is payable by the drawee at the time of presentation. (See also, Draft, Time Draft.)
Spot exchange. The immediate conversion of one currency to another at the prevailing exchange rate.
(See also, Forward Exchange.)
SIC Codes (Standard Industry Classification). A numerical coding system formerly used in the United States to classify
various types of businesses, goods and services. Replaced by NAICS Code.
tare. Weight of the package in which merchandise is contained and/or packing materials used to protect it. Gross
weight minus tare gives net weight.
tenor. Terms fixed for payment of a draft; e.g., sight, 90 days after sight, 60 days after shipment date.
through Bill of lading. See multimodal transport document.
time Draft. A draft which is payable at a determinable future date. It is drawn on a buyer (importer) or bank and,
once signed as accepted by the drawee becomes the drawee’s obligation to pay at maturity.
(See also, Trade Acceptance.)
trade acceptance. A time draft that has been accepted across the face of the instrument, in writing, by the drawee
(generally the buyer/importer) thus signifying the drawee’s undertaking to honor the acceptance at maturity. (See
also, Documents Against Acceptance.)
ucp (uniform customs and practice for Documentary credits). Globally accepted (by all member nations of the
International Chamber of Commerce) set of rules governing letter of credit transactions.
Warehouse receipt. A receipt issued by a warehouse operator for goods received for storage.
With average. A Marine Insurance term meaning that a shipment is protected from partial damage whenever the
loss exceeds a stipulated percentage.
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BARREL =
36 British Imperial gallons
9987.12 cubic inches
BOARD FOOT =
144 cubic inches
2360 cubic centimeters
BUSHEL =
2150.42 cubic inches
35.2390 liters
CARAT =
200 milligrams
3.0865 grains
CENTIARE (square meter) =
10.764 square feet
1.196 square yards
CENTIMETER =
0.3937 inch
CORD =
128 cubic feet
3.625 cubic meters
DRAM (fluid) =
60 minims
3.697 milliliters
4 grams (approx.)
GALLON (U.S.) =
231 cubic inches
4 quarts
8 pints
3.785 liters
128 fluid ounces
GALLON (British Imperial) =
277.42 cubic inches
1.201 U.S. gallons
4.546 liters
Table of Weights and Measures
GRAIN = OUNCE, FINE =
0.00014 pound avoirdupois troy ounce
0.0648 grams 480 grains
31.104 grams
GRAM =
15.43 grains POUND =
0.0353 ounce 16 ounces
0.0022 pound 7000 grains
454 grams
HUNDREDWEIGHT (British) = 0.454 kilogram
112 pounds 14.58 troy ounces
50.80 kilograms
QUARTER (British) =
KILOGRAM = Quarter hundredweight
2.2046 pounds 28 pounds
35.274 ounces 12.68 kilograms
15432.36 grains
0.0011 short ton QUINTAL =
0.00098 long ton 100 kilograms
220.46 pounds
LITER =
1.000027 cubic decimeter STERE =
0.2642 gallon 1 cubic meter
1.057 quarts
61.02 cubic inches STONE (British) =
0.035 cubic foot 14 pounds
33.8147 fluid ounces 6.35 kilograms
270.518 fluid drams
TON (short) =
METER = 2000 pounds
39.37 inches 907 kilograms
3.28 feet
1.09 yards TON (long) =
2240 pounds
OUNCE 1016 kilograms
(Avoirdupois, ordinary) =
437.5 grains TON (metric) =
0.911 troy ounce 1000 kilograms
0.0000279 long ton 2204.62 pounds
28.3495 grams
OUNCE, FLUID =
1.805 cubic inches
29.58 milliliters
Bank of america merrill lynch SolutionS for importerS
©2009 Bank of America Corporation.
AA AE 0890ED 05 2008 050071
An Importer’s Guide to Global Trade Services
Bank of America Solutions for Importers
An Importer’s Guide to Global Trade Services
Bank of America merrill lynch Solutions for exporters
Table of Contents Table of Contents
An Importer’s Guide to Global Trade Services
01 Introduction to Global Trade Services
02 Overview of Trade Services
03 Understanding Your Payment Options
05 Trade Solutions
10 Risks
15 Working with Your Bank
17 Services to Meet the Diverse Needs of the Importer
21 Let Bank of America Introduce a Few Ways You Can Increase Opportunities
23 Import Letters of Credit Defined
29 Frequently Asked Questions
31 Parties and Roles in Commercial Letter of Credit Transactions
32 Mitigating the Risk of Fraud in the Trade Arena
33 Anti-Money Laundering Policies and OFAC Compliance at Bank of America
35 20Most Important Characteristics of an Import Letter of Credit
37 Understand and Control Your Import Letters of Credit
38 Opening a Commercial Letter of Credit
42 Understanding the Commercial Letter of Credit Application
45 A Discussion of UCP 600
55 A Discussion of the eUCP
57 S.W.I.F.T. Samples and Comments on Specific Fields
59 Comments on Specific Fields in Preceding Sample
63 Purchase Order-to-Pay Service
67 A Closer Look at Letter of Credit Documents
68 What Are Some of the Typical Documents Required in a Letter of Credit?
81 Frequently Asked Questions
82 A Discussion of the ISBP
84 Documentary Collection for Importers
89 Cash Flow Diagram
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The material presented in this guide is for informational purposes only, and is not intended as an exhaustive treatise on international
banking, nor is it intended to explore all the possible risks involved in using import letters of credit or other services mentioned.
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Introduction to Global Trade Services
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Overview of Trade Services
What do we mean by trade services?
Trade is a broad term covering a variety of transactions linked to the export and import of goods. Traditional trade
services include letters of credit, international collections and bankers’ acceptances.
What is the history of trade?
The economic history of man has led us from self-sufficiency to division of labor, from provision of bare necessities
to satisfaction of sophisticated needs. The primitive caveman attended only to his own needs, but civilization soon
progressed to a stage in which each individual specialized in what he could do best and exchanged his surplus
output for that of his neighbor. This was the beginning of trade.
When small city-states developed into nations, the need for trade increased. No nation could supply all of its needs
with its own resources. Consequently, these small city-states had to begin trading with one another. What may
have started as barter led to the development of currency, silver and gold coins and eventually to paper notes and
negotiable instruments such as letters of credit.
As far back as the fifteenth century BC, Phoenician traders carried letters of credit to foreign ports in the form of
clay tablets, stamped with the seals of prominent merchants. During the Middle Ages, letters of credit were written
on sheepskins and used extensively by traders such as Marco Polo.
Today business is conducted not only domestically but also abroad. As the search for new markets and lower cost
labor has led to international commerce, so it has led to finding alternative ways to do financial business overseas.
The buyers and sellers in international trade are confronted with diverse geographic, social, economic, and
political conditions. The dynamic interplay of these forces requires the trading partners to assess the risks of the
transaction and to decide how the risks may be reduced or eliminated.
What is the primary role of a bank in international trade?
The primary role of a bank is to provide risk reduction alternatives to both the buyer and the seller. This booklet will
attempt to examine the many facets of international trade from an importer’s, or buyer’s, point of view.
What happens in a trade transaction?
A seller approaches or is approached by a potential buyer. Trade transactions begin with the negotiation of a
contract between a buyer and a seller and end with the exchange of goods or services for monetary payment.
Why do you need Bank of America Global Trade Services?
As noted above, trade can be domestic or international. Clients utilize Bank of America Global Trade Services
specifically to overcome the risks of doing business abroad, where the cultures, regulations, and payment
conventions may differ significantly from those in the United States. In the United States, you could potentially
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perform your own analysis on your potential sellers and with a sense of security close a deal. In this case, your bank
would get involved only in the collection and/or disbursement of funds. Overseas, you need greater protection when
dealing with sellers who are less well known and where you could potentially have limited legal ability to collect for
any loss suffered. Hence, a bank provides up-front financial protection in the form of letters of credit, as well as
offers guidance and support in the use of other forms of payment.
Bank of America works to be a value-added business partner and reaches beyond offering world-class services. We
provide a consultative approach to trade services in which our clients draw from the solid base of experience and
expertise of a dedicated staff eager to propose new ideas.
Understanding Your Payment Options
How will you pay for your shipment?
Nations, companies and individuals have engaged in trade for centuries and, from the beginning, have searched for
the best means of securing payment. Today, an importer has four basic alternatives for providing payment to sellers
of imported goods. Each method addresses certain levels of risk for the buyer and the seller.
Open Account: The seller ships the goods in advance of payment or according to the negotiated terms. In this
instance, the seller relies on the buyer’s good faith that the payment will be made after he has received the goods.
Traditionally, if open account or cash in advance are agreed upon as the payment method, documentation covering
shipment of merchandise is handled outside of banking channels. The banking system at one time was only involved
in the remittance of funds.
Banks are now involved in the facilitation of open account payments, using varying degrees of conditional checking
of original purchase orders against invoices. Bank of America offers a Purchase Order-to-Pay service, with three
levels of data matching. Please see Chapter 4 of this Guide for details. If payment is to be made using a collection or
letter of credit, a bank normally adds its service and documentary expertise on behalf of either the buyer, the seller,
or both. In all cases, the actual movement of funds is done via one of our traditional cash management products
such as direct debit or credit to an account, wire transfer, or check.
Collection: There are two types of Collections: clean and documentary.
• Clean: A clean collection refers to the absence of supporting documentation. A check or a draft is presented for
payment under a clean collection.
— check: Payment by check is typical for domestic open account transactions, but less appropriate for
international transactions. In an international transaction, overseas sellers must give checks to their banks
for collection and conversion to their home currency, a process that can take three to six weeks. A more
satisfactory method therefore is the wire transfer; buyers instruct their banks to arrange for the seller’s bank
account to be credited directly.
— Draft: A draft is an instrument much like an ordinary check in appearance which, in this circumstance, is
used as a formal demand for payment. It is also known as a bill of exchange.
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• Documentary: A documentary collection provides a buyer and seller with a measure of protection whereby a
bank intermediates to exchange payment for documents of title to the goods. The collecting bank releases the
documents, which normally allows the buyer to take delivery of the goods. The bank then either wires the buyer’s
payment to the remitting/seller’s bank for credit to the seller’s account or creates an acceptance (please refer
to Chapter 7 for an explanation of acceptances) covering the transaction. There are two forms of documentary
collections: regular and direct.
— regular: After making a shipment, sellers present the shipping documents to their banks, who in turn send
them to the buyers’ banks for payment or acceptance.
— Direct: The sellers/exporters deliver the documents with a collection letter to the foreign collecting banks
themselves and send copies of the collection letter to their banks for follow-up (tracing and payment
settlement). The collection letter or form is provided to the seller by the seller’s bank and bears the seller’s
bank letterhead and the collection reference number.
Letter of Credit (LC): This is a trade finance instrument issued by a buyer’s bank in favor of a beneficiary/
seller, which substitutes the bank’s credit-worthiness for that of the buyer. In a narrow sense, it is a specialized
instrument used to guarantee payment for a shipment of goods or services fromone party to another. A letter of
credit is payable against conforming documents.
Cash in Advance: The buyer pays in advance of shipment of goods or according to the terms, such as cash on
delivery. As an importer, you most likely will not agree to this option, as you will be out the cash before receipt of the
goods.
What types of agreements are made between the buyer and the seller?
The sales contract is an agreement between the buyer and the seller in which the various terms, conditions and
details of the transaction are specified. Given the complexities of international trade, it is important that the sales
contract state, in terms clear to all parties, the requirements involved in the transaction.
In the simplest form, the sales contract is an accepted order to buy or offer to sell that arises from correspondence
between the buyer and seller. The agreement may be made verbally or in writing. The buyer may initiate the
correspondence by inquiring as to the price and terms of sale for specific merchandise or by simply placing an order
for the merchandise when the price and terms have previously been established.
The sales contract has four main components:
• Description of the goods
• Price
• Method of payment
• Timing of delivery
Although contracts can be verbal, it is highly recommended that they be formalized in writing in all situations.
The sales contract should clearly specify the documents required for any international transaction. The letter of
credit must specify the documents required for payment under the letter of credit. The seller is responsible for
the production and/or procurement of all documents. Documents required under letters of credit will be more
thoroughly discussed in Chapter 5.
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A purchase order is a common vehicle that the buyer uses to place an order for merchandise or services when the
price and terms have previously been established. Unlike a sales contract, it should always be submitted by the
importer or buyer. A purchase order should itemize in precise detail the description of the goods, quantity ordered
with unit description and delivery instructions for each item.
If a purchase order is referred to within the merchandise description of a letter of credit, this can help make the
seller responsible for providing merchandise according to the submitted purchase order. The seller can also be
required to state that merchandise is in accordance with the buyer’s purchase order when submitting documents,
thereby making the seller responsible for the fulfillment of the purchase order. A purchase order can also be
used without a letter of credit for an open account payment. As you will see in Chapter 4 of this guide, Bank of
America now provides an electronic solution for importers who wish to utilize open account payments but want the
assurance of “conditions matching” against their purchase order prior to payment.
How does Bank of America support its Global Trade Services clients?
Bank of America is able to act on many fronts for our clients.
• We act as financial service consultants.
• We provide import and export financial services to our clients.
• We act on clients’ behalf both domestically and overseas via our global branch network.
• We provide various credit services to support clients’ import/export needs.
• We provide economic analyses and forecasts about various countries around the world.
• We listen to our clients’ needs for new technology that will keep them competitive in the world marketplace, and
then we put our experts to work on solutions that meet their needs.
Trade Solutions
What international trade services are available with Bank of America?
As a truly global organization, Bank of America is uniquely positioned with trade services and expertise to serve
clients’ needs in markets worldwide to help them seize international opportunities wherever they arise.
Our services range from trade services and lending to liquidity management, payment services, structured trade
finance, and foreign exchange services. We deliver what client’s organization need to succeed in international
business by offering innovative, tailored solutions, a wealth of trade expertise, the latest in technology, and a
network of offices around the world.
With more than 1,000 trade specialists in over 50 offices worldwide and an extensive international correspondent
bank network, we can provide the global reach and regional expertise to help you accomplish your trade goals.
Bank of America finances international trade through bankers’ acceptances as well as several types of letters of
credit. It also offers various open account, collections and reimbursement services.
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Open Account Services
As you’ll learn in Chapter 4 of this guide, Bank of America and other international banks have been involved in
open account services for years, but at Bank of America we’ve recently added an electronic engine to the process on
our Bank of America Direct® Trade Services platform, providing initiation and reporting on open account payments
as well.
Additionally, Bank of America specialists route international payments as quickly as possible to their final
destination, often by simply crediting one of them any accounts our correspondents keep with us. When you
need documentation sent with your payment, or your supplier prefers checks, our foreign draft service allows
you to draw a check on a local bank in multiple currencies. Our foreign exchange services provide comprehensive
foreign currency payment services, and the ability to purchase competitively-priced spot and forward contracts for
payments on import transactions. Please refer to Chapter 11 of this guide for more information on foreign exchange
and international cash management services offered by Bank of America.
Bankers’ Acceptances
A bankers’ acceptance is a negotiable instrument that is drawn on, and accepted by, a bank to finance a trade-
related transaction. It is often a relatively inexpensive way to finance trade transactions.
Bankers’ acceptances are versatile and can be used for several purposes: acceptances can cover both documentary
letters of credit (Documentary BAs) and open account transactions (Clean BAs). They can finance imports, exports,
and domestic transactions.
Acceptances offer a source of funds at competitive rates since banks are not required to provide reserves for
financing such transactions. Acceptances are very liquid—they can readily be sold in secondary markets.
• non-Discounted Bankers’ acceptances—Bank of America either creates and accepts or accepts a time draft
drawn on us which relates to a specific financial transaction in which our client is involved. We are obligated to
pay the specified amount on the maturity date of the draft. Our obligation for payment to any holder of the draft
at maturity date is unconditional, independent of the underlying financial transaction.
• Discounted Bankers’ acceptances—Bank of America creates or accepts, and discounts, a time draft drawn on us
which relates to a specific financial transaction in which our client is involved. The drawer is paid at the time
of acceptance of the draft, less fees and discount charges. The discount rate applied is based on the market
rate that investors in the secondary market are paying for drafts of various tenors and amounts; this rate
fluctuates daily. In recent years the cost of financing on an acceptance basis has generally been lower than
prime-rate-based lending.
Letters of Credit
A letter of credit is an instrument issued by a bank by which the bank substitutes its obligation to pay the seller for
the obligation of the buyer, on specified terms. Letters of credit have many variations.
• Standby letters of credit
“Standby letter of credit” is a term used for the type of letter of credit that functions like a guarantee. Standby
letters of credit usually provide a type of monetary assurance to compensate a beneficiary in the event of
noncompliance by the applicant with the terms of a contract. They are often used instead of cash deposits or
as performance or bid bonds in international and domestic transactions. Like other letters of credit, standby
letters of credit provide a bank’s name and credit support for a specific transaction. In a standby letter of
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credit, the beneficiary looks first to the account party for payment before seeking payment from the bank.
Standby letters of credit can cover either financial, performance or trade-related transactions.
• financial Standby letters of credit
We issue a standby letter of credit for our client or add our confirmation to a standby letter of credit issued
by a correspondent bank. Financial obligations involve repayment of funds borrowed or advanced in the
event the applicant fails to do so. In effect, we substitute our own credit standing for that of our client (or our
correspondent bank) and assure that payment will be made in the event of default.
• performance Standby letters of credit
In this type of obligation, we assure compensatory payment to the beneficiary in the event that the applicant
does not perform the contractual agreement the applicant has entered into with the beneficiary. We add our
credit standing to that of our client (or our correspondent bank) and assure that payment will be made in the
event of default under bid bonds or performance bonds.
• commercial letters of credit
Commercial letters of credit involve payment in exchange for compliant documents required under a letter of
credit, relative to goods shipped or services performed. The beneficiary obtains payment from the issuing bank
or confirming bank (if any). Import and export letters of credit are types of commercial letters of credit.
• import letters of credit
We issue a new documentary letter of credit for our client. By doing so, we substitute our own credit standing
for that of the buyer and assure that payment will be made to the seller if terms and conditions of the letter of
credit have been fulfilled.
• export letters of credit
Export letters of credit, when properly executed, may help protect an exporter’s (beneficiary’s) interests against
the risk of losing title to the goods until they are paid. Bank of America assists with the structuring of letters of
credit, arranges for their confirmation and identifies discrepancies in documents that may delay payment.
• Confirmed Export Letters of Credit
Another bank, usually one of our correspondents, issues its own letter of credit and asks us to authenticate it,
add our confirmation to it and advise it to the beneficiary. When we confirm another bank’s letter of credit, we
add our credit standing to that of the issuing bank and guarantee that payment will be made to the seller if
terms and conditions of the letter of credit have been fulfilled.
• Unconfirmed Export Letters of Credit
A bank, usually the applicant’s bank in the country of the applicant of the letter of credit, issues its own letter
of credit and asks us to authenticate it and advise it to the beneficiary without adding our own confirmation.
Deferred Payments
• import lc Deferred payments
Deferred payments are created under import letters of credit that we issue for the applicant, our client. We
are obligated to make payment on the designated maturity date. As no draft, or negotiable instrument, exists
under a deferred payment letter of credit, the beneficiary cannot obtain payment prior to the maturity date.
There is no draft to discount. See this guide’s section on page 92 for more information about drafts.
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• Confirmed Export Deferred Payments
Payments under letters of credit issued by correspondent banks are postponed (after presentation of
documents) for periods of time as stipulated in the letter of credit. If we add our confirmation to the
correspondent bank’s letter of credit, we are obligated to make payment on the designated maturity date
whether or not the funds have been made available to us by the issuing bank. The advantage of a negotiable
instrument in the form of a draft does not exist and, therefore, the beneficiary cannot obtain payment prior to
the maturing date, as there is no draft to discount. See this guide’s section on page 92 for more information
about drafts.
• Unconfirmed Export Deferred Payments
As in the case of unconfirmed letters of credit, we will pay only when and if funds have been made available
to us by the issuing bank. The advantage of a negotiable instrument in the form of a draft does not exist and,
therefore, the beneficiary cannot obtain payment prior to the maturing date, as there is no draft to discount.
See this guide’s chapter on page 92 for more information about drafts.
Reimbursements
• Unconfirmed Reimbursements
An issuing bank authorizes Bank of America to debit its account and to pay claims made by paying, accepting
or negotiating banks. We will make such payments only if the issuing bank has sufficient funds on deposit with
us to cover the claim.
• Confirmed Reimbursements
An issuing bank asks Bank of America to confirm its obligations under a letter of credit it has issued and
authorizes us to debit its account and to pay claims made by paying, accepting or negotiating banks. By adding
our confirmation, we add our bank’s creditworthiness to that of the issuing/authorizing bank and are obligated
to make payment whether or not the issuing/authorizing bank has sufficient funds on deposit with us to cover
the claim.
Air Release
Bank of America issues our indemnity on behalf of and for the account of our client in favor of an airline for the
purpose of authorizing the carrier to release a shipment of goods when the air waybill has been consigned to
the bank. In return for our issuing the indemnification on our client’s behalf, our client must provide us with an
indemnity in our favor. This arrangement pertains to import letters of credit and incoming collections.
Shipside Bonds/Steamship Guarantees
Bank of America issues our indemnity on behalf of and for the account of our client in favor of an ocean carrier
for the purpose of authorizing the carrier to release a shipment of goods without the normally required shipping
documents. In return for our issuing the indemnification on our client’s behalf, our client must provide us with an
indemnity in our favor. This arrangement also pertains to import letters of credit.
Collections
• incoming clean Domestic collections
Bank of America receives a clean collection from a domestic bank. We will serve as collecting bank and
communicate with the drawee, usually our client, to facilitate payment to the remitting bank.
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• incoming clean international collections
Bank of America receives a clean collection from a foreign bank. We will serve as collecting bank and
communicate with drawee, usually our client, to facilitate payment to the remitting bank.
• outgoing clean Domestic collections
Bank of America opens/sends a request for payment to a domestic collecting bank at the request of our client.
When paid by the collecting bank, we will remit funds to the drawer (our client).
• outgoing clean international collections
Bank of America opens/sends a request for payment to a foreign collecting bank at the request of our client.
When payment is received from collecting bank, we will remit funds to the drawer (our client).
• incoming Documentary collections
Bank of America receives a documentary collection from another bank. We will serve as the collecting bank
and communicate with the drawee, usually our client, to facilitate payment to the remitting bank.
• outgoing Documentary collections
Bank of America opens/sends a request for payment of documents to a collecting bank at the request of our
client. When paid by the collecting bank we will remit funds to the drawer (our client).
• export Bills collections
Bank of America creates a collection instrument for tracking and receiving funds due a correspondent bank in
exchange for documents sent to a third bank. Delivery of documents may be an integral part of the service.
Trade Acceptances
A trade acceptance is a time draft that is accepted for payment by a party other than a bank—usually the buyer.
This could apply to any of the types of collections, as defined above.
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Risks
Trade involves buyers and sellers seeking to exchange goods or services despite their differences in language,
national custom, credit procedures and accounting practices. Merchants have always had, and continue to seek,
ways of minimizing the risk of non shipment and/or risk of nonpayment. Following is a chart comparing the
payment terms.
Table 1.1: Comparison of Payment Terms with Relative Risk*
Goods Available Timing of Payment
Method of Payment to Buyer to Seller Risk to Buyer Risk to Seller
Sight Letter of Upon settlement When documents Has assurance of Very little or none based
Credit of LC unless goods have been presented shipment but relies on conditions in the LC and
consigned direct to and found to comply on seller to ship provided no discrepancies
buyer with LC terms goods as described in between documents and LC
(normally after the documents
shipment)
Time (Usage) Letter Upon the bank Upon maturity of Actual payment Very little or none, based
of Credit releasing documents payment terms, or (regardless of product on conditions in the LC and
of title, unless goods upon discounting of a quality) is due after provided no discrepancies
consigned direct to bankers’ acceptance possession of goods between documents and LC
buyer
Sight Draft for After payment unless Upon presentation of Has assurance of Possible nonpayment by
Collection DP1 goods consigned draft and documents shipment but relies buyer
direct to buyer to buyer on seller to ship
goods as described in
the documents
Time Draft for Upon acceptance of Upon maturity of Buyer undertook Possible nonpayment by
Collection DP2 time draft, unless time draft trade obligation to pay buyer at maturity of trade
goods consigned acceptance when accepted time acceptance (buyer has
direct to buyer draft; relies upon possession of the goods)
seller to ship goods
as described
Open Account Upon delivery
Upon payment of None Full reliance on buyer to pay
invoice invoice as agreed
* None of these payment methods protect against fraud. This chart is provided for information and illustration only. It does not purport to
encompass all of the possible risks to a buyer or seller involved in any given trade transaction.
1 DP1 Also known as Documents Against Payment or Cash Against Documents (CAD).
2 DP2 Also known as Documents Against Acceptance, Time Draft, and Trade Acceptance..
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Introduction to Global Trade Services
What are some of the decision factors used in determining payment terms?
When do the goods pass from the seller to the buyer and when does payment occur? Can you, as a buyer, trust the
seller to deliver promptly with the correct goods if you have already paid for the merchandise (cash in advance
terms)? Are you willing to pay promptly if goods are shipped first (open account terms)? The answer to these
questions will depend on how well the parties know each other. This knowledge can be gained through experience or
research. Alternatively, intermediaries can be used to mitigate the risks; this has been the traditional role of banks.
The choice of method of payment (means by which the buyer will pay the seller) takes into account several factors:
• Physical location of buyer and seller
• Extent of competition from other sellers
• Level of personal knowledge or prior experience between the buyer and seller
• Availability of other buyers
• Accounting, payment and regulatory restrictions between countries
• Reputation of buyer and seller
• Creditworthiness of buyer and seller
• Customary practices in the individual country or industry
• Dollar amount of transaction
• Urgency to receive payment
What are the risks associated with making the payment?
The importation of goods from foreign markets involves greater risks for you as an importer than those associated
with domestic trade. While in domestic trade, you may be willing to pay “cash in advance” due to good credit
information, reliable bank checks, easy communication and an understandable legal system. You will often require
greater protection in international trade.
The documentary collection and the letter of credit are two such alternatives to open account and cash-in-advance
methods of payment. Both of these alternative methods of payment protect the buyer and the seller from losses in
varying degrees and offer both the buyer and the seller varying degrees of convenience in making payments. In
general, the greater the protection for the buyer, the less convenient and the more costly the payment terms are for
the seller.
One of the most important determinants of the payment method to be utilized in any particular transaction is the
level of risk in the transaction. You, as buyer, must always weigh the risks and the amount of protection desired
against being noncompetitive within your market. During the negotiation process, both sides must:
• Analyze the major risks they encounter in international trade transactions
• Review alternative payment methods, the levels of protection and the types of financing provided with each one
• Understand the various factors that must be considered in the formulation of a sales contract
• Understand international credit policy as related to the transaction
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Chapter 01
Introduction to Global Trade Services
What overriding risks are always factors to consider?
• commercial risk
As a buyer, you are primarily concerned with whether sellers can and will ship the goods. You need to
determine if sellers have the ability to produce or obtain the goods, as well as whether they will ship the
products in a timely fashion. Not only do you need to know if they will ship, you are also vitally interested in
knowing if the goods will be of the quality and quantity ordered and expected. To help mitigate commercial
risk, you can investigate your sellers’ trade references from other buyers (whose names you have requested
from the supplier) and/or through local World Trade Centers or Chambers of Commerce.
• political and economic risk
You should also familiarize yourself with information concerning the economic and political stability of the
country in which you’re doing business. This information should also include current and future trends of the
country’s economy, political situation and the possibility of the implementation of exchange controls. Bank of
America economists follow the economic and political situations in most countries very closely and can be an
excellent source for this type of information. Other sources are foreign country consulate offices and various
publications produced by Dun and Bradstreet International, the U.S. Department of Commerce International
Trade Administration, Moody’s, local Chambers of Commerce or World Trade Centers.
Economic and political risks you might want to be aware of are: cancellation of export licenses due to currency
freezes, hostile laws and court systems, civil war, boycotts and sanctions, confiscation of merchandise,
currency devaluation, liquidity problems and implementation of exchange controls.
Which are the riskiest payment methods?
Cash in Advance is riskiest to the buyer. Open Account is riskiest to the seller. You must weigh the pros and cons of
using the various payment methods against the risks. The chart below should help to visualize the risks.
Payment Method Risk
risk to Seller risk to Buyer
RISkIEST
Open Account
Documentary
Collection
Letter of Credit
Cash in Advance
RISkIEST
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How do you determine the appropriate payment option?
In addition to the very important payment and shipment risks, the following chart gives some guidelines on
determining which payment options may be appropriate for a particular trade transaction. Please note that the key
determinants are: Relationship, Type of Goods (stock or custom), Political and Economic environments, and the
importance of Timely Cash Flow and Delivery.
Table 1.2: Payment Options
Documentary
Cash in Advance Letter of Credit Collections Open Account
Relationship New New Established Established
Type of Goods Custom made Custom made Stock items Stock items
Political Unstable Unstable Stable Stable
Economic Unstable Unstable Stable Stable
Timing of Cash Yes Yes No No
Flow and Delivery
What are the advantages of letters of credit to the buyer (importer)?
Buyers can benefit in the following ways:
• Buyers usually do not have to tie up working capital prior to actual shipment of merchandise
• Letters of credit allow for flexibility in documentary requirements
• Buyers are assured that their bank will pay the seller only when the seller’s documents conform to the terms
and conditions of the letter of credit
• Letters of credit offer the opportunity to receive extended payment terms from the seller, by arranging for a
letter of credit that is payable at a future date
• Letters of credit provide the ability to delay payment until documents are received
• This type of payment mechanism enhances the buyer’s ability to plan sales and distribution because latest
shipping date is known
• Barring supplier fraud, payment is limited to what was ordered
• Bank of America can issue letters of credit denominated in foreign currency, which enables the buyer to comply
with seller’s request for payment in foreign currency.
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What are the risks of letters of credit to the buyer?
Letters of credit deal only in documents, not in goods. The major risk may be that the merchandise may not be as it
is represented in the documentation.
What are the advantages of letters of credit to the seller (exporter)?
Sellers can benefit in the following ways:
• Minimized credit risk by shifting risk from the buyer to the buyer’s bank
• Reduced commercial/political risk by shifting it from the buyer to the buyer’s bank
• Provides assured and prompt payment by reducing the risk that payment for the goods might be delayed or
otherwise jeopardized by political or foreign exchange problems in the buyer’s country
• Improved ability to obtain bank financing.
What are the risks to the seller?
The seller’s documentation must conform exactly to the terms and conditions of the letter of credit to ensure
payment.
What about the risk of fraud?
Since the beginning of time, buyers with specific needs have been approached by sellers who claim to be able to
fulfill those needs, but have no intention of doing so.
As markets in certain countries tighten and economies in these countries suffer, fraudulent schemes will be
increasing. These schemes will proliferate particularly in countries with few or no exchange controls, weak legal
systems and an inability to use their resources in the global mainstream. Please refer to pages 32—34 of this guide
for information about Bank of America’s procedures and policies that attempt to prevent fraud, money laundering
and other illegal activities.
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Chapter 02
Working with Your Bank
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Chapter 02
Working with Your Bank
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Chapter 02
Working With Your Bank
As an importer, you know that sourcing products globally can lower costs, broaden product lines, and diversify
sources of supply. You also know the challenge of getting the right product to the right place the right time.
Different time zones, languages, and business practices hinder communication. Lengthy shipping times and
customs clearances complicate inventory management. And the payment terms demanded by overseas suppliers
can tie up your credit and slow down the flow of documents needed to clear merchandise through customs. You
need specialized banking services to help overcome these obstacles. You need a bank with seasoned experts in
international trade and a family of specialized banking services tailored to the unique needs of the importer.
You need Bank of America Import Services
Bank of America Import Services offers you a comprehensive array of services; services that can help you receive
products quicker, reduce the amount of credit you have to tie up, and ease your administrative burdens. Our
network of correspondent banks is extensive, allowing us to work directly with your supplier’s banks. With this
worldwide network of correspondent banks, Bank of America can help you access almost any market.
Payment options to meet your needs
Bank of America stands ready to assist you with a full range of payment options. Our international trade specialists
can assist you in selecting the option that best fits the needs of both you and your vendors. Whether you are buying
on open account, with cash against documents or on a letter of credit basis, we have the resources and the expertise
you need. And we deliver our services in almost any currency you might choose. Our specialists are dedicated to
handling your transactions as efficiently and as smoothly as possible.
Accessible expertise
Bank of America has more than 1,000 experienced international trade specialists dedicated solely to the
management and growth of our clients’ international business. Strategically located from coast to coast in the
United States and in various foreign locations, we travel extensively to keep in touch with clients. Our expertise in
structuring import transactions offers you the kind of knowledge and experience you need.
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Innovative services developed as needs change
Bank of America has developed a forward-looking suite of electronic banking services, allowing importers to initiate
transactions and receive reports via the Internet with the use of Bank of America Direct® Trade Services. By fully
integrating electronic applications into our global issuance system, we can issue your letters of credit faster and
more accurately. Take advantage of the trade module, Trade Services, to:
• Increase processing efficiency and decrease processing errors
• Easily share trade data critical to business partners both within other areas of your organization and with
outside partners such as freight forwarders and customs brokers
• Have better and faster access to your global trade activity and information
• Enjoy round-the-clock access to your trade information no matter where you’re located.
As a premier provider of cash management services, Bank of America has developed innovative sweep accounts and
automatic investment services to keep your money working longer for you.
An extensive network
Our correspondent bank network is able to handle almost any import transaction efficiently. Over the past thirty
years we have carefully developed and cultivated an extensive network of correspondents worldwide. Our network
allows us to deal directly with your vendors’ banks, saving you time and money. Our in-depth knowledge of overseas
markets and business practices can be invaluable to importers seeking to structure unusual transactions.
Services to Meet the Diverse Needs of the Importer
Open Account
Lowering fees and streamlining financial supply chain processes are a top priority for most buyers. At the same
time, ensuring vendors have financing options similar to those associated with traditional letters of credit is an
important consideration. Bank of America is committed to developing solutions to assist buyers in optimizing
and integrating their supply chains. Our open account payment solutions help clients re-engineer their trading
processes and unlock substantial amounts of working capital for their company and their trading partners.
Bank of America has enhanced its Bank of America Direct® Trade Services to handle purchase order advising,
tracking and reconciliation for letter of credit and open account payments. Our goal is to integrate letters of credit,
documentary collections and open account trade payments seamlessly into each customer’s preferred electronic
delivery channel. A complete description of this service is provided in Chapter 4 of this guide.
Documentary Collections
Many clients find that suppliers who initially ask for cash in advance or a letter of credit may be willing to sell on
a documentary collection basis. Commonly referred to as “cash against documents” or as “sight draft” terms, this
payment mechanism allows foreign vendors to instruct Bank of America to retain control of the shipping documents
until payment is made or their draft is accepted. By routing Documentary Collections through Bank of America,
vendors are assured that a world-class bank is following their instructions. Our clients benefit by not having to
prepay for the product or tie up their credit.
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Chapter 02
Working with Your Bank
Letters of Credit
Letters of credit continue to be one of the most common payment options used in international trade, especially for
imports from Asia and Latin America. Bank of America has international trade specialists to help you structure
your letters of credit and a correspondent bank network that can get the letter of credit to your supplier as quickly
as possible.
As one of the largest issuers of letters of credit in the world, Bank of America has invested in electronic application
systems that free our clients from retyping any of the standard clauses in their letters of credit. Using a standard
Web browser, you supply only the details specific to the particular transaction and send the application to us via the
Internet. Your Web-based electronic applications are fully integrated into our issuance system for truly superior
response time and accuracy. This same system gives you activity and status reports, available on your personal
computer at your convenience.
Letters of credit are primarily oriented toward protecting the interests of beneficiaries. No letter of credit can
protect the buyer against fraud. Protection in any import transaction is contingent upon the performance of
the exporter, and there is no substitute for knowing the reputation of your supplier. However, Bank of America’s
international trade specialists can help structure your credits to better protect your interests. When appropriate,
performance bonds, inspection certificates, insurance policies, and more specific shipping schedules can be
incorporated into your credits, giving you additional control over the transaction. Our specialists can advise you as
to when a standby letter of credit might be an appropriate way to assure payment to a vendor. Whenever you need
help in structuring your letters of credit, you can rely on Bank of America.
Easy L/C®
When you’re involved in global trade, the need for letters of credit isn’t limited by the size of your company. Smaller
companies often have modest credit needs and straightforward shipping arrangements, but they shouldn’t have
to navigate the same complex and time-consuming application, underwriting, and approval processes as larger
companies seeking letters of credit with more complicated requirements and higher dollar values.
If your import credit needs do not exceed $100,000.00 and you have an account with Bank of America, Easy L/C
offers a simplified application form and streamlined approval process, which reduces turnaround time and can save
you money with a low front-end fee.
The application is short and simple to complete. We can even send it to you in electronic format to get your
application off to the fastest start possible. Your letter of credit is generally approved and issued within 24 hours.
Bank of America doesn’t require a secured deposit as collateral for your Easy L/C. It’s prepaid from the cash in your
company’s existing Bank of America account.
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Working with Your Bank
Cash Secured Letters of Credit
Cash secured letters of credit are secured by funds that you have in an appropriate Bank of America deposit
account for the balance and term of the letter of credit. Cash secured transactions are subject to credit approval;
collateral advances can be made on balances on hand subject to financial information verification.
Bankers’ Acceptance Financing
Whether you buy on open account with documentary collections or through letters of credit, Bank of America
can finance your imports with bankers’ acceptances. These short-term, fixed-rate instruments can significantly
lower your financing costs. As part of letter of credit transactions, bankers’ acceptances can give you extended
terms, allowing your vendors to maintain their cash flow by discounting the instrument at what is normally a very
favorable rate. Your vendor can pay some or all of the financing costs. Borrowing procedures and documentation are
simple and straightforward.
Private Labeling of Letters of Credit
Bank of America provides private labeling of letters of credit to qualifying clients. Your company becomes the
issuer of letters of credit using an existing subsidiary suitable for the purpose or a new “Special Purpose Vehicle”
company. Bank of America provides the same level of operational support for these letters of credit as provided
when we are the issuer of the letters of credit.
Private labeling would allow you to significantly reduce your reliance on bank credit, lower letter of credit charges,
improve service to your vendors, and improve the efficiency of the process through the intelligent use of technology.
Our solutions are designed to give you the choice of how you want to structure the processing of private-labeled
letters of credit, and how you would like to structure the financial side of these transactions as well. Additionally,
because of our comprehensive and aggressive vendor financing program in Asia, our local trade officers can meet
with your vendors, help them prepare for your private-labeled letters of credit, and discuss their financing needs if
appropriate.
Soft Restriction Program
Our soft restriction program is designed to assure that Bank of America is involved on both the import and export
side of a letter of credit transaction, thus reducing processing time. When a new commercial letter of credit is
issued to a beneficiary in Asia, the letter of credit contains wording that restricts negotiation of the letter of credit
to one of our Asian banking centers. When documents under these letters of credit are presented to our Asian
banking center, we are able to eliminate the duplicate step of document examination.
With this program we create both tangible and intangible value for all involved parties. Applicants will realize the
advantages of a streamlined import process due to a lowered discrepancy rate, reduced vendor noise because of
lower product cost, faster processing and better control over transactions. For vendors, local bank representatives
who are familiar with their accounts can assist in eliminating discrepancies. This will provide faster turn-around
times, resulting in increased working capital velocity, lower interest costs and lower transaction costs with more
efficient processing.
Bank of america merrill lynch SolutionS for importerS
Chapter 02
Working with Your Bank
Supply Chain Financing
Buyers often mandate that their suppliers extend payables terms and move from letters of credit to private label
letters of credit or open account terms. This can place significant financial pressure on suppliers who rely on letters
of credit to meet their working capital needs. Buyers are now beginning to recognize the need for alternatives that
enable their suppliers to obtain financing as an inducement for accepting extended terms. By recognizing their
suppliers’ need for financing, buyers can reduce cost of goods sold (COGS), more efficiently manage working capital
and strengthen supplier relationships.
Bank of America offers a comprehensive suite of supply chain financing programs that enable buyers to provide
their suppliers with access to credit.
Foreign Exchange Services
Bank of America Foreign Exchange Services give you the option to pay your vendors in their own currency. We
provide a full range of foreign exchange services, from simply sending wires denominated in foreign currency
to helping corporate clients develop and execute sophisticated hedging strategies. In addition to competitively-
priced spot and forward contracts, options, and futures, our foreign exchange traders can offer information about
market trends that can help you plan your foreign exchange strategy. Our London and Singapore foreign exchange
operations assure an around-the-clock capability.
Cash and Treasury Management Services
Bank of America Treasury Management Services help you manage your cash position and cash flow. We
build comprehensive, customized solutions to meet the unique needs of our clients, improve their financial
competitiveness, and make their treasury functions more efficient.
Working together, we can help you streamline the way you make payments, collect your receipts, and reconcile your
accounts worldwide. With our broad treasury management suite of services, we guide you through the steps to
make your treasury functions more efficient.
Small Business Services (Trade Client Services)
There may have been a time when you didn’t think your company could import merchandise from overseas or sell
your goods abroad. Not any more. For companies like yours, great business opportunities lie beyond our country’s
borders. And isn’t opportunity exactly what you seek for your company?
Trade Client Services is made up of a team of trade finance professionals with many years of experience. They’re
waiting for your call and the opportunity to help you find working capital solutions for your organization. Trade
Client Services has been organized to cover all U.S. time zones, so you’ll easily and conveniently be able to speak
with a representative personally.
Bank of america merrill lynch SolutionS for importerS
Chapter 02
Working with Your Bank
Let Bank of America Introduce a Few Ways You Can Increase
Opportunities
Economic forecasting and industry specialists
At http://corp.bankofamerica.com portal, click on “Investment Solutions” to find the latest economic and industry
analyses. Banc of America Securities economists, based in New York, Hong Kong and London, analyze and forecast
U.S. and international economic conditions and financial market trends and post their findings on this site.
The coverage includes analysis of macroeconomic indicators, forecasts of interest and foreign exchange rates, and
perspectives on government policies. This work, coupled with research on emerging markets, fixed income, foreign
exchange and global risk, supports a wide variety of Banc of America Securities’ capital markets and client-focused
activities.
In the end it’s all about the people—Superior client satisfaction
We recognize that you have many choices in banks and that, in the final analysis, service will drive whether you
continue to use Bank of America. It’s for that same reason that your customers continue to do business with you.
We strive to maintain a professional and skilled international banking staff in every office location. Furthermore,
we are extremely sensitive to the unique needs of each client. We pride ourselves on a high level of personalized
service built on a long-term relationship.
Bank of America has extensive involvement with large retail and consumer companies, and therefore is familiar
with the seasonal fluctuations that are prevalent in these industries. Our global trade offices are staffed effectively
to manage these peak cycles by proactively working with the client to know exactly when these fluctuations will
occur during the year. We understand that there are critical times in each client’s business cycle and are committed
to constantly providing consistent quality service.
A global team of trade associates is typically established to meet our client’s specific processing requirements.
Bank of America will assign a primary operations contact that is responsible for technical consultation and
ensuring compliance with each client’s service requirements.
In June 2000, Bank of America was proud to receive the International Organization for Standardization (ISO) 9001
certification in recognition of the rigorous quality standards set and achieved by the bank throughout its Asia
Operations Center in Hong Kong.
In the past few years independent research firms have conducted client satisfaction interviews with Bank of
America import letter of credit clients located throughout the United States. Performance measurement categories
included timeliness, accuracy, capability, staff knowledge/servicing, technology and client loyalty. Nearly ninety-
six percent of our clients reported that they were either very satisfied (highest possible rating), satisfied, or
somewhat satisfied with Bank of America’s overall import letter of credit service. Our Global Trade Services
business is committed to moving to and maintaining a Six Sigma level of client service, and numerous performance
measurements are in place to that end.
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Working with Your Bank
Depend on Bank of America
Your business is filled with unique and diverse challenges; challenges that demand creative, flexible and
comprehensive solutions. To help you find these solutions, you need a partner who has extensive experience,
overseas expertise and a wealth of resources. You need Bank of America Import Services. We can provide you
with a complete range of payment options and a worldwide correspondent network. We’ll take the time to help you
determine how you can make your international business run as smoothly, efficiently and profitably as possible. We
will also be ready to help you re-evaluate your options as your needs change. For further information, contact your
local Bank of America Global Trade & Supply Chain Solutions officer.
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Chapter 03
Import Letters of Credit Defined
023Bank of america merrill lynch SolutionS for importerS
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Chapter 03
Import Letters of Credit Defined
Chapter 03
Import Letters of Credit Defined
An import letter of credit is a conditional payment mechanism under which the issuing bank irrevocably promises
to pay the seller if presented documents comply with all of the letter of credit terms and conditions. The issuing
bank substitutes its credit for that of the buyer.
All letters of credit have similar attributes and this section will restate some of those attributes. It is important not
only to understand the attributes, but also the underlying principles.
A commercial letter of credit offers protection to both the buyer and seller and, for this reason, is often used as a
means of payment. A letter of credit offers the buyer a high degree of assurance that goods and services will be
delivered and reduces trading risks. In the letter of credit process, the bank is the intermediary between the seller
(an exporter) and the buyer (an importer). The issuing bank issues the letter of credit on behalf of the importer,
examining the documents received, to ensure conformity to the terms and conditions of the letter of credit. If the
documents are correct, the bank makes payment, either immediately or at a specified future date.
When the bank issues the letter of credit, it substitutes its credit for that of the importer. In doing so, bank
promises to pay the exporter upon presentation of documents in good order. The bank deals only with the
documents called for in the letter of credit, not with the actual goods involved. For example, if a letter of credit
specifies that the exporter ship a container of steel and the quality of the steel does not meet the buyer’s
expectations, the exporter will nevertheless be paid as long as documents are presented in conformity with the
terms and conditions of the letter of credit.
Typically the exporter’s bank acts as the advising, examining and paying bank. It may also confirm and negotiate
letters of credit on its client’s behalf.
Prior to any letter of credit transaction, the buyer and seller should negotiate and agree to the terms and conditions
to be specified.
Bank of America can help structure your import letter of credit and suggest terms that are favorable and achievable
to both you and your suppliers. This facilitates LC compliance, which ensures that you receive your commercial
shipment according to the terms agreed upon without delay.
Bank of america merrill lynch SolutionS for importerS
Chapter 03
Import Letters of Credit Defined
Letter of Credit Flow Chart
Buyer
issuing /
Buyer’s Bank Seller’s Bank Seller Buyer
02 03 04 0501
STEP ONE STEP TWO STEP THREE STEP FOUR STEP FIVE
Buyer Applies Buyer’s Bank Transmits LC to Advises LC to Goods Produced
for Letter of Issues LC and... Seller’s Bank Seller and Shipped
Credit
Seller
Seller’s Bank
issuing /
Buyer’s Bank
Buyer
06 07 08 09
STEP SIX STEP SEVEN STEP EIGHT STEP NINE
LC Presented to Seller’s Bank Issuing Bank Issuing Bank Debits
Seller’s Bank Examines Examines Buyer’s Account and
with Required Documents and Documentation Releases LC Documents
Documentation Sends Making Funds Available
Documents to for Payment to Seller
Issuing Bank
10
Seller Buyer
STEP TEN
Buyer Exchanges
Documents for Goods
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Chapter 03
Import Letters of Credit Defined
Letter of Credit Flow Chart—Steps 1 Through 4
Buyer
issuing /
Buyer’s Bank Seller’s Bank Seller
02 03 0401
01
02
03
04
STEP ONE STEP TWO STEP THREE STEP FOUR
Buyer Applies Buyer’s Bank Transmits LC to Advises LC to
for Letter of Issues LC and... Seller’s Bank Seller
Credit
The buyer fills out a letter of credit application that satisfies the terms of the purchase agreement plus the
requirements of customs law, shipment and document coordination.
The issuing bank, usually the buyer’s bank, rechecks the application to ensure that it is complete and
workable.
The issuing bank transmits the credit to a correspondent bank by telex, S.W.I.F.T. or (rarely) airmail and
asks them to advise and/or confirm the instrument.
The correspondent bank receives the letter of credit, checks for authenticity, records the transaction and
transmits the instrument to the seller/beneficiary, adding their confirmation if requested. Upon receipt of
the letter of credit, the seller should carefully review it to determine whether its performance requirements
can be complied with and whether it is acceptable from a credit perspective.
Bank of america merrill lynch SolutionS for importerS
Chapter 03
Import Letters of Credit Defined
Letter of Credit Flow Chart Steps 5 Through 7
Seller Seller’s Bank Seller
issuing /
Buyer’s Bank
05 06 07
STEP FIVE STEP SIX STEP SEVEN
Goods Produced Documents Seller’s Bank Examines
and Shipped Presented to
Seller’s Bank
Documents and Sends
Documents to Issuing Bank
05
06
07
Upon determination that the letter of credit is acceptable, the seller should ship the goods precisely
consistent with its terms and conditions.
The seller must prepare documents exactly as required and present them to the proper paying bank. The
proper paying bank may be any bank specified in the credit to accept, pay or negotiate. This may be the
advising bank, confirming bank, issuing bank or (on a freely negotiable credit) any bank that is willing to
negotiate.
When the paying bank receives the documents, it will examine them to determine if they are in order
pursuant to the credit’s terms and conditions. If in order, the bank may pay, accept, or negotiate as required
by the letter of credit. The negotiating bank will transmit the documents to the issuing bank and request
reimbursement. Under an LC payable at sight, the issuing bank may effect reimbursement to the seller’s
bank by remitting funds directly to the seller’s bank, authorizing the seller’s bank to debit the issuing bank’s
account, or by authorizing the seller’s bank to claim from a third bank where the issuing bank maintains an
account.
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Chapter 03
Import Letters of Credit Defined
Letter of Credit Flow Chart Steps 8 Through 10
issuing /
Buyer’s Bank
08
Seller’s Bank
issuing /
Buyer
Buyer’s Bank Seller
09 10
STEP EIGHT STEP NINE STEP SEVEN
Issuing Bank Examines Issuing Bank Debits Buyer’s Account Seller’s Bank Examines
Documents and and Releases LC Documents, Documents and Sends
Reimburses Bank Seller Receives Payment Documents to Issuing Bank
08
09
10
Upon receipt of the documents, the issuing bank will examine them to ensure that they are in order as
specified and then reimburse the negotiating bank. For time drafts, reimbursement is made at maturity of
the bankers’ acceptance.
Issuing bank debits buyer’s account and releases documents. For a time draft, the buyer’s account will be
debited at maturity. Seller’s bank pays exporter after being reimbursed by buyer’s bank.
The buyer exchanges the shipping documents for the goods.
Bank of america merrill lynch SolutionS for importerS
Chapter 03
Import Letters of Credit Defined
Frequently Asked Questions
What is a letter of credit?
A letter of credit is a financial instrument issued, generally by a bank, to an individual or corporation by which
the bank substitutes its own creditworthiness for that of the individual or corporation. Letters of credit facilitate
importing and exporting by assuring the seller/exporter’s payment for goods sold against compliant documents.
Without such assurances of payment, foreign trade would be severely curtailed.
Why should I use letters of credit when importing?
Companies purchasing materials, supplies and services from domestic suppliers generally have established trade
credit and can buy on open account terms. In international trade, it is more difficult to establish trade credit,
especially with new relationships. Generally, the foreign seller will require either cash in advance or a commercial
letter of credit. The letter of credit assures the seller that payment will be received, and it may help the seller obtain
financing for the production and shipment of the goods being purchased. In addition to improving your cash flow,
the letter of credit gives you some protection because payment will not be made without presentation of all required
documents. Those documents must also comply with the terms of the letter of credit. However, the letter of credit
does not eliminate the need for you to check out the foreign seller’s ability to produce, as well as his integrity and
business reputation.
Other than my banker, who else should I be using as a resource?
In addition to your Bank of America Trade specialist, you can obtain assistance from a great number of sources—
both public and private. The type of business in which you are engaged and the international expertise of your
existing staff will determine who you should use. Some of the more commonly used resources for obtaining
importing expertise include:
Government Private
Foreign consulates and commercial attachés Trade banking specialists
U.S. diplomatic personnel International lawyers
U.S. Customs personnel Customs brokers
A good customs broker is frequently the key to successful importing and should be contacted before finalizing any
contracts
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What agreements are involved in an import letter of credit transaction?
01. Sales contract. Agreement between the buyer (account party or applicant) and the seller (beneficiary) which
gives rise to the use of a letter of credit.
02. purchase order. The buyer’s order to buy, usually describing merchandise to the unit level of detail. A
purchase order is normally submitted directly to the seller by the buyer, either electronically or hard copy.
03. application for credit. Agreement between the buyer (applicant) and the issuing bank which spells out their
mutual obligations, including that of the applicant to reimburse the issuing bank when payments are
made to the beneficiary in accordance with the terms of a letter of credit. For assistance in filling out an
application for a letter of credit, refer to page 42 of this Guide.
04. letter of credit. Agreement between the issuing bank and the seller (beneficiary) that specifies conditions
that must be met before payments will be made.
What is the difference between an advised and a confirmed letter of credit?
The letter of credit transaction usually involves two banks, the buyer’s bank issuing the letter of credit and a bank
in the seller’s country that advises the letter of credit to the beneficiary. The advising bank may also assume the
role of confirming bank. Whether advising and/or confirming, the seller’s bank assumes certain responsibilities.
advising: An advising bank acts as the agent of the issuing bank. The function of the advising bank is to take
reasonable care to verify the authenticity of letters of credit it receives and then accurately transmit the letters
of credit to their beneficiaries. When advising a letter of credit, the bank assumes no liability. On receipt of the
documents for examination and payment, the advising bank will pay the seller only if it received good funds and has
received reimbursement from the issuing bank, even if it was specifically nominated as the paying bank in the letter
of credit.
Confirmation: By confirming a letter of credit, the advising bank or another bank assumes the same responsibilities
as the issuing bank, including the obligation to pay against presented documents (if they are in order and all of the
letter of credit terms are met). In effect, the beneficiary has the individual promise of two banks—the issuing bank
and the confirming bank—to pay against conforming documents. Confirmation of a letter of credit is an extension
of credit and requires credit approval of the issuing bank by the confirming bank. When a bank confirms a letter of
credit, it takes the credit risk of the issuing bank and must have in place a credit limit for that issuing bank.
How is a letter of credit confirmed?
When negotiating the terms of sale, the seller may require a letter of credit that requests the advising bank to add
its confirmation. The buyer includes this request when submitting the application for letter of credit issuance to
his or her bank. In most instances, the issued credit states: “Please advise beneficiary adding your confirmation”
or words to similar effect. Note, this is a request, not a requirement. The advising bank for various reasons may
decline to add its confirmation and simply advise the letter of credit without confirmation.
What documents are usually required under a letter of credit?
The documents for an international sale can vary significantly from transaction to transaction depending on the
destination and the product being imported. See Chapter 5 for a detailed discussion of letter of credit documents.
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Parties and Roles in Commercial Letter of Credit Transactions
What are the parties and roles in an import letter of credit?
01. account party/applicant—The buyer of goods or services who requests the letter of credit to be opened under
its liability by the issuing bank.
02. Beneficiary—The seller of goods or services to whom the letter of credit is addressed and who is entitled to its
benefits.
03. issuing Bank—The primary financial institution that initiates and writes the letter of credit extending its
guarantee and liability to pay if the terms and conditions are fulfilled.
04. advising Bank—The bank, usually in the beneficiary’s country, whose primary job is to pass on the letter of
credit to the beneficiary. The advising bank is normally a correspondent bank of the issuing bank. That
means that the two parties have exchanged authentication procedures and may have also established
accounts with each other. An important part of passing on a letter of credit to a beneficiary is verifying
the authenticity of the letter of credit to it. When the advising bank authenticates the credit, it is saying
that the letter of credit is a genuine instrument from the named issuing bank. It is not commenting on
the creditworthiness of the bank or its country. This procedure gives the seller some protection against
fraudulent instruments. That is why it is common practice to have letters of credit advised to a seller
through a correspondent bank. Letters of credit may be received by the advising bank by mail, telex, cable
or S.W.I.F.T. (S.W.I.F.T. is the acronym for Society for Worldwide Interbank Financial Telecommunication, a
telecommunication network of member banks.)
05. Drawee Bank or paying Bank—This is the bank named in the credit as duly authorized to make payment.
Drafts are drawn and/or documents presented to this bank as a general rule. However, special instructions
might modify this procedure. In the U.S., this is generally the issuing bank, i.e., the buyer’s bank.
06. examining Bank—Both the issuing bank and the seller’s bank must examine all documents stipulated in the
credit with reasonable care to ascertain whether or not they appear, on their face, to be in compliance with
the terms and conditions of the credit.
07. Confirming Bank—A confirming bank is a financial institution requested by the issuing bank to add its
guarantee of payment or acceptance to the credit instrument. It is necessary for this bank to establish a
credit line or facility for the issuing bank in order to agree with this request. The bank requested to add its
confirmation is usually but not necessarily the advising or drawee bank. A seller should request the buyer to
authorize the issuing bank to request confirmation. Import letters of credit issued by Bank of America do not
normally request confirmation from another bank, due to their “AAA” credit rating.
08. reimbursing Bank—At times, the issuing bank names a bank where the issuing bank keeps funds in the
currency of the letter of credit to pay on its behalf, drawee or negotiating banks to whom payment is due.
This bank, named in the letter of credit, known as a reimbursing bank, is usually named under the special
instructions portion of the letter of credit. See I.C.C. Publication No. 600, Article 13.
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09. negotiating Bank—Negotiation is the process whereby a bank examines the documents and actually pays
funds to the beneficiary. This is not very common because most banks are not willing to advance funds prior
to receipt of the goods. The beneficiary is paid immediately upon examination of documents conforming to
the LC or after approval by the issuing bank is determined by the payment terms stipulated in the letter of
credit. The negotiating bank is either nominated by the beneficiary under a freely negotiable letter of credit
or designated as a restricted negotiating bank by the issuing bank. The concept of a negotiating bank allows
more flexibility into the payment mechanism and enables beneficiaries to present documents for payment to
their local bank.
Mitigating the Risk of Fraud in the Trade Arena
At Bank of America we constantly strive to protect our clients from the risk of fraudulent trade finance
transactions. In our Trade Operations units around the globe, many evaluation processes take place each day in an
attempt to recognize and prevent fraud. Here are some of the precautions we take:
• We transmit and receive secure and authenticated letters of credit, collections and related messages via
S.W.I.F.T. (Society for Worldwide Interbank Financial Telecommunication; see page 57 of this guide for an
example).
• While the UCP 600 tells us that “Banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any documents(s) . . .” (Uniform Customs and Practice for
Documentary Credits, 2007 Revision, International Chamber of Commerce), the close and careful examination
of documents ensures that they are reflective of the requirements in the letter of credit and thus serves to
reduce the likelihood of payment against fraudulent documents.
• All of our associates that handle trade transactions are required to participate in Anti-Money Laundering
training, enabling them to understand the red flags in a transaction that may point to fraud as it relates to
money laundering. This training includes “Know Your Customer” evaluation metrics, and stresses reporting of
any suspicious transaction.
• All of our associates that handle trade transactions attend Compliance Training courses, further refining their
skills in recognizing and properly reporting of suspicious transactions.
• Our associates stay current on fraud issues in our business through trade publications, conferences, internal
broadcasts and participation in professional trade organizations.
• Our Web-based trade activity management system, Bank of America Direct® Trade Services , can also help
reduce the incidence of trade fraud by providing complete security and one point of entry into the Bank of
America back office.
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Anti-Money Laundering Policies and OFAC Compliance at
Bank of America
Anti-Money Laundering (AML)
Crime has a destructive and devastating effect on the communities in which we operate. Safeguarding the global
financial system is critically important for the economic and national security of the jurisdictions in which Bank of
America operates. Accordingly, it is the policy of Bank of America to take all reasonable and appropriate steps to
prevent persons engaged in money laundering, fraud, or other financial crime, including the financing of terrorists
or terrorist operations (hereinafter collectively referred to as “money laundering”) from utilizing Bank of America
products and services.
With a view to ensuring that the financial system is not employed as a channel for criminal funds, associates
at Bank of America make reasonable efforts to determine the true identity of all parties involved in Bank of
America transactions. Bank of America conducts its trade business in conformity with high ethical standards in
the countries in which it does business and strictly adheres to all laws and regulations pertaining to financial
institutions. While it is accepted that Bank of America may not always be able to determine whether a transaction
originates from, or is a part of, a criminal activity, Bank of America follows these general principles:
01. Bank of America takes reasonable steps to determine the true identity of all customers and beneficial users
of Bank of America products and services.
02. Bank of America will not knowingly accept funds from, make loans to, or do any type of business with
customers whose money the bank believes is derived from criminal activity.
03. Bank of America will not ignore indications that a customer’s money originated from criminal or other
money laundering activities. When Bank of America becomes aware of facts which lead to a reasonable
suspicion that funds held by it are from criminal or other money laundering activity or that transactions
entered into are themselves criminal in purpose, appropriate measures, consistent with the law, will be
taken. These include denial of assistance to the client, severing relations with the client, closing or freezing
accounts, and when appropriate, filing of a suspicious activity report.
04. Bank of America will avoid providing support or assistance to clients seeking to deceive law enforcement
agencies through the provision of false, altered, incomplete or missing information.
05. Bank of America will cooperate fully with law enforcement and regulatory agencies to the extent that it can
do so under all applicable foreign and domestic laws.
06. Bank of America will report all identified instances of suspicious activity to the extent that it can do so under
all applicable foreign and domestic laws.
Anti-Boycott Policy
Bank of America Corporation, its domestic affiliates and its offshore branches, offices, subsidiaries and controlled
affiliates are “U.S. persons.” They transact business with residents and nationals of boycotting and boycotted
countries as well as with other persons and corporations that do business with such countries and their nationals.
Therefore, Bank of America often receives requests to comply with unsanctioned foreign boycotts.
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Such requests most frequently occur in letter of credit transactions. Bank of America handles several thousand
letters of credit and collections each year, which involve persons and commerce of boycotting and boycotted
countries.
Bank of America is committed to full compliance with all laws applicable to its business, including anti-boycott laws
of the United States. Accordingly, bank units must not enter into any agreement or implement any letter of credit
containing an impermissible boycott condition or take any other action prohibited by the United States. Additionally,
bank units must not implement any letter of credit or process any other document if it uses the term “blacklist” or
“boycott” or if its implementation or processing would constitute boycott participation under United States tax laws.
Bank of America general anti-discrimination policy prohibits all bank units from discriminating against any person
based on race, religion, sex or national origin. Bank units must not engage in any transaction containing such a
condition. Bank of America does not engage in any discriminatory business practices in connection with the Arab
League’s boycott of Israel.
Office of Foreign Assets Control (OFAC) Compliance
OFAC administers and enforces economic and trade sanctions based onUS foreign policy and national security
goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in
activities related to proliferation of weapons of mass destruction. OFAC acts under Presidential wartime and
national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions
and freeze foreign assets under U.S. jurisdiction. Many of the sanctions are based on United Nations and other
international mandates, are multilateral in scope, and involve close cooperation with allied countries. OFAC has
promulgated regulations to help administer its program. AllU.S. persons and entities, including banks, federal
branches and agencies, international banking facilities, and overseas branches, offices and subsidiaries of U.S.
banks must comply with the laws and OFAC-issued regulations. In general, these regulations:
• Require blocking of accounts and other assets of specified countries, entities, and persons.
• Prohibit unlicensed trade and financial transactions with specified countries, entities, and persons.
Bank of America maintains an effective OFAC compliance program, including written policies and procedures for
checking transactions for possible OFAC violations, designating associates responsible for day-to-day compliance,
establishing and maintaining strong lines of communication between departments of the bank, associate training,
and an annual in-depth audit of OFAC compliance. Letters of credit, wire transfers, and non-client transactions such
as funds transfers are compared with OFAC lists before being conducted.
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20 Most Important Characteristics of an Import Letter of Credit
01. irrevocable—This term means that the issuing bank cannot cancel or amend an LC without the consent of the
beneficiary.
02. expiry Date and issue Date—As agreed upon between the buyer and the seller. Commercial import letters of
credit generally expire in the country of the beneficiary.
03. issuing Bank / advising Bank—Needs to be listed.
04. importer/exporter—Make sure that the full name of your seller and the seller’s address, as well as the full
name and address of your own company, are correctly stated on the letter of credit application and the letter
of credit itself.
05. Value/currency—The amount of your letter of credit should conform to the amount of your sales contract.
Make sure that the currency of the amount is accurately indicated on your letter of credit application.
06. Description of Goods/Services—We recommend that you employ a very simple merchandise description
when applying for a letter of credit. Excessive details may cause discrepancies and delays; if the nature of
your sale requires a detailed description of merchandise, it belongs in the sales contract or purchase order
agreement between you and your seller. The sales contract number or purchase order agreement can then be
quoted in the merchandise description of the letter of credit.
07. required Documents—See Chapter 5, “A Closer Look at Letter of Credit Documents.”
08. payment terms—Also known as “Tenor.” Make sure that payment terms are accurately indicated on your
letter of credit application, and correctly quoted in the letter of credit. The payment term “At Sight” indicates
that the bank will pay “within a reasonable time” after documents have been presented by the beneficiary
and found to be in order. If a letter of credit indicates “90-Days Sight,” with discount charges for beneficiary’s
account, you agree to 90-day terms, and you will be debited 90 days after the presentation of the draft and
complying documents. If the discount charges are for the buyer’s account, payment to the beneficiary will be
effected “At Sight” and the buyer will pay discount charges at the point of negotiation and the face value of
the draft at maturity. See Chapter 7 for a complete discussion of usance terms.
09. incoterms—Shipment terms. See IncoTerms, Chapter 9.
10. port to port (Dispatch to Destination)—Make sure that your letter of credit application correctly states the port
of shipment and the port of destination, as indicated in your sales contract.
11. uniform customs and practices, publication no. 600—Your letter of credit should state that it is subject to the
Uniform Customs and Practice for Documentary Credits Publication No. 600 of the International Chamber of
Commerce.
12. Who pays fees?—Unless otherwise stipulated in the letter of credit, all banking charges are for the account of
the applicant. If charges are for the beneficiary’s account, as specified on the letter credit, they are normally
deducted from the face amount of the draft at the time of payment.
13. latest Shipment Date—The latest shipment date should be the same as that agreed to in your sales
agreement. If you do not stipulate a latest shipment date in your letter of credit application, it is understood
as the same date as the expiry date.
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14. presentation Date or Stipulation—The presentation date is usually a stipulation such as “Documents must
be presented for negotiation within 15 days after the on board date of the ocean bill of lading, and within
the validity of the letter of credit.” A 21-day presentation stipulation is understood, in the absence of any
statement to this effect (see Article 14(c), UCP 600).
15. partial Shipments allowed/not allowed—If your letter of credit application does not indicate that partial
shipments are prohibited, it is understood that partial shipment is allowed. Make sure that this information
agrees with your original sales contract with the seller.
16. transshipment allowed/not allowed—If your letter of credit application does not indicate that transshipments
are prohibited, it is understood that transshipment is allowed. Make sure that this information agrees
with your original sales contract with the seller. Transshipment means that the merchandise is loaded on
a carrier that only goes to a certain point, and at that point the merchandise is unloaded and reloaded onto
another carrier.
17. reimbursement instructions—Determines when payment will be received by the exporter. Four major types of
reimbursement instructions are: a) issuing bank authorizes advising bank to debit their account; b) issuing
bank instructs advising bank to claim reimbursement from a third bank (reimbursing bank); c) issuing bank
requires advising bank to send them a cable notifying them that documents have been received and found to
be in compliance with letter of credit terms, after which issuing bank remits funds to advising bank; and d)
issuing bank requires advising bank to send documents to them for payment (slowest method of payment).
18. availability—Your letter of credit is either freely negotiable or straight. A freely negotiable LC will indicate
that it is “available with any bank by sight payment, by deferred payment, by acceptance or by negotiation.”
A negotiating bank may play various roles pursuant to the latitude extended by the letter of credit, but it
normally is allowed to take the documents in charge and pay the beneficiary against funds received from
the issuing bank. A straight, or restricted, LC will indicate that it is “available with (named bank) by sight
payment, by deferred payment, by acceptance or by negotiation.” The beneficiary must present documents at
the counters of the named bank.
19. confirming Bank—For all intents and purposes, beneficiaries normally present their documents to the
confirming bank and regard it as the primary source of payment. A confirming bank is obligated to pay
against compliant documents, regardless of whether or not funds are received from any reimbursement
source.
20. reimbursing Bank—The reimbursing bank is usually named under the Special Instructions portion of a letter
of credit, or in field :78: of a S.W.I.F.T. 700 message.
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Understand and Control Your Import Letters of Credit
What can an importer do to make sure that the letter of credit process works for him?
As an importer, you should strive to exercise control over this process. That’s why it’s so important to understand
the process and to establish a written contract or sales agreement with your seller before you apply to your bank
(the issuing bank) for a letter of credit. Your contract, sales agreement or purchase order should contain all the
conditions that are necessary to be included in the letter of credit.
When your bank issues a new letter of credit on your behalf, it will normally provide you with a copy of the letter of
credit. Always read the letter of credit thoroughly. If any parts of your letter of credit are not clear to you or do not
seem to agree with your letter of credit application and/or sales contract and/or purchase order, contact your local
Bank of America Global Trade Operations representative.
Also make sure that you understand any additional wording that Bank of America has added to the letter of credit
as we issue it.We are giving additional instructions directly to the advising bank in most cases, but you should
understand the meaning of these instructions.
Normally your seller should not ship merchandise until your letter of credit has been issued by your bank. You
may, however, ask your bank to issue a preliminary advice of the letter of credit to your beneficiary. This process
will provide you and your seller with a letter of credit number for tracking purposes, and will give your seller the
reassurance needed before shipping merchandise.
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Opening a Commercial Letter of Credit
Your bank looks at an import letter of credit line in much the same manner as any loan request. Careful evaluation
is made of your ability to reimburse Bank of America when drafts drawn under the letter of credit are presented or
when time drafts (acceptances) mature. Furthermore, a review of the importer’s overall credit strength is required
when it is anticipated that loans will have to be made to finance the payment of the draft. As with any type of
commercial loan, the bank obtains appropriate borrowing authorization, resolutions, guarantees, etc. from the
client.
To get started, discuss your trade finance business with your Bank of America Global Trade & Supply Chain
Solutions representative and determine the product that best suits your credit needs. Our bankers also understand
that your financial needs change as your business grows—from basic to fully integrated services. Tell us about your
changing needs and let us help you prepare for your financial future.
You will then complete an application and submit it to your banker. The application should be typed or neatly
printed, signed and accompanied by any required documents. Please note that we reserve the right to change the
Application and Agreement for Commercial Letter of Credit form when we deem appropriate.
Bank fees related to issuing and negotiation of import letters of credit are related to the cost, risk and time involved.
As with all major banks, charges are also levied for incidental activities that arise under import letters of credit.
Letters of credit are irrevocable and cannot be canceled prior to the expiration date without the written consent of
the beneficiary. After issuance, cancellation or other changes may only be effected by an amendment submitted to
Bank of America and with the agreement of the beneficiary.
A copy a Bank of America Commercial Letter of Credit Application is provided here, along with an explanation of
each of the fields on the application.
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Understanding the Commercial Letter of Credit Application
Commercial Letter of Credit Application
01. applicant—Enter your legal name exactly as it appears on your preapproved line of credit or application for
credit.
02. full text teletransmission /courier—Bank of America will send the issued letter of credit to an advising bank
in the country of the beneficiary using the method that you choose. When “full text teletransmission” is
chosen, Bank of America normally sends the letter of credit via S.W.I.F.T. to the advising bank for forwarding
to the beneficiary. Letters of credit can also be sent by a brief teletransmission advice, followed by full details
by airmail or courier. This same advising bank must be used when making an amendment to the letter of
credit.
03. advising Bank—Enter the name of the bank the beneficiary wishes to use to advise the letter of credit. If no
specific bank has been requested, leave this blank. Bank of America will send the letter of credit to a branch
of Bank of America or a correspondent bank in the beneficiary’s country to deliver the letter of credit to the
beneficiary. The only responsibility of the advising bank is to take reasonable care to check the apparent
authenticity of the letter of credit that it advises, thoroughly test key arrangements, and then mail or deliver
it to the beneficiary. In addition, advising banks might be nominated or requested to negotiate credits but
have no obligation to do so.
04. for account of—Use this box if you want the letter of credit to be issued on behalf of an entity other than the
applicant. Otherwise, leave blank.
05. in favor of—Enter the name and address of the beneficiary. The beneficiary is the party from which you are
buying the merchandise. This is the party entitled to be drawn under the letter of credit and the party that
will receive payment upon presentation of documents that comply with the terms of the letter of credit.
06. expiration Date—Enter the date the letter of credit is to expire. Be sure to allow plenty of time for the
beneficiary to make the shipment and present the documents required by the letter of credit. The expiration
date cannot be later than the date your available credit expires. Letters of credit typically expire at the
offices of an advising or negotiating bank in the beneficiary’s country. To allow time for any drawing to
reach us, collateral is generally held for 30 days after the expiration date. If the letter of credit expires at our
counters, the collateral is generally held for ten working days. This allows for documents that may still be in
transit to reach us.
07. amount—Enter the amount of the letter of credit in figures followed by the amount in words. Enter the name
of the currency. If blank, the currency will be assumed as U.S. dollars. However, your beneficiary may require
the letter of credit to be paid in a major foreign currency such as the Euro, Japanese Yen or British Pounds
Sterling. If the letter of credit is issued in a foreign currency, you undertake the exchange rate fluctuation
risk, and additional credit approval will be required.
08. covering—Letters of credit are usually issued for 100% of the amount of the invoice. They can be issued
for less than the full amount of the invoice if, for example, you have made an advance payment to the
beneficiary.
09. available By Drafts at (tenor)—The draft is the document that represents the demand for payment that the
beneficiary makes on the bank. Most letters of credit call for drafts at “Sight,” where the beneficiary is paid
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at the time documents are received and found to be in compliance with the terms of the letter of credit. If, on
the other hand, the beneficiary and bank have agreed to give you payment terms, the letter of credit will call
for drafts payable at some future time. For example, drafts payable at “90-Days Sight” or payable at “45 days
after Bill of Lading date.”
10. partial shipment—Check the appropriate box to indicate whether or not you will allow payment on partial
shipments.
11. transshipment—Check the box to indicate whether or not you will allow transshipment. Transshipment
means that the merchandise is loaded on a carrier that only goes to a certain point and at that point the
merchandise is unloaded and reloaded on another carrier. Transshipment should always be permitted on
air shipments and combined transport method shipments. It may be prohibited on shipments where direct
shipping service between the supplier and you is always available.
12. transferable letter of credit—Check the box to indicate whether or not you will allow this letter of credit to
be transferred by the beneficiary. A transferable letter of credit allows the beneficiary of a letter of credit to
make available (transfer) all or part of the proceeds of the letter of credit to a separate party. The parties to
whom the letter of credit is transferred acquire the same rights and responsibilities under the letter of credit
as the original beneficiary. Transferable letters of credit are typically used when both parties require the
protection of the letter of credit and the first beneficiary of the letter of credit is an agent or intermediary
procuring goods from another supplier whose identity he does not want to disclose to the buyer.
13. Shipment from—To: For shipments where a multi modal document is called for, complete at least fields
A and/or D, fields B and C are optional and should be used as applicable to give clear information about
the expected movement of the goods. For shipments where an ocean or charter party bill of lading OR an
air waybill is called for, complete fields B and C only. For shipments where road, rail or inland waterway
documents are called for, complete fields A and D only.
14. merchandise to Be Described in invoice as—Enter a brief description of the merchandise. If your description
is too detailed, we may ask you to shorten the description before we issue the letter of credit. A detailed
description of the merchandise belongs in the contract between buyer and seller or in purchase order, not in
the letter of credit.
15. Shipping terms/price Basis—Also known as Incoterms, the shipping terms you select should be discussed
and agreed to with your supplier in advance of completing the application. The price basis determines
which services and related costs, usually freight and insurance, are included in the price, in addition to the
cost of the goods themselves. International trade terms used in connection with specific prices should be
understood thoroughly by both the buyer and seller (see Incoterms).
16. Documents required—This area contains a number of commonly requested letter of credit documents to
demonstrate shipment of the merchandise you’ve contracted to buy. The documents you will need from the
beneficiary depend upon the contract between you and the beneficiary, the country from which the goods will
be shipped, the price basis and, in some cases, the merchandise itself. Your Customs House Broker can give
you guidance regarding the documentation you will need from the beneficiary. Refer to Chapter 5 for more
information on documents typically required under a letter of credit.
commercial invoice: This is always required. Specify how many originals and how many copies you’ll need.
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packing list: Typically required, it describes the contents that were packed into the containers you’ll be
receiving. Specify how many originals and how many copies you’ll need.
Certificate of Origin: Typically required, it certifies where your merchandise originated. Specify how many
originals and how many copies you’ll need.
negotiable marine/air insurance policy: Check this box if your shipping term includes insurance. Stipulate who
is to effect the insurance coverage. Also check the boxes to indicate which risks should be covered by the
insurance policy.
transport Documents: Indicate type of transport document and number of originals required based on the
expected mode of shipment.
consigned to/the order of: Indicate to whom the merchandise will be consigned, the order of and how the
consignment must be endorsed. This is the party that will be able to take possession of the goods.
marked notify: Specify a party to be notified when the goods arrive for dispatch to the consignee. Marked
Freight: Check the box to indicate whether freight is to be covered on a “collect” or “prepaid” basis.
other Documents: List any additional documents you expect the exporter to produce. These could include
Inspection Certificates and Phytosanitary Certificates, among others. If the shipment is to be made by air,
you may wish to require a signed statement from the beneficiary that one set of documents has accompanied
the shipment. This will enable you to pick up the merchandise as soon as it arrives. This should be included
in Special Instructions.
17. Special instructions to be included in the letter of credit: When there are additional terms or conditions that are
not covered by these documents, you can indicate them here. Bank of America automatically indicates that
any banking charges other than ours are to be charged to the beneficiary, unless you indicate otherwise. We
may inquire about the purpose of special instructions requested by you, to ensure that they can be complied
with.
18. Special instructions for Bank of america: Use this area to tell us who we should call with any questions about
your application and who to contact if there are discrepancies in the documents presented.
19. Documents must be presented to the negotiating or payment bank no later than: This is the amount of time the
seller has to obtain, complete and present all documents required under the letter of credit for payment.
If this space is left blank, the shipper may take up to 21 days to present documents, not to exceed the
expiry date of the letter of credit. Steamship companies normally require an original bill of lading to
release merchandise. If you allow the shipper too many days to present documents, the ship may arrive at
the destination port in advance of the documents. The merchandise will then be placed in storage by the
steamship company and will accrue demurrage charges. The number of days entered here added to the
latest shipment date in box No. 12 should arrive at the expiration date in box No. 5.
Agreement
Following the demonstration copy of the Commercial Letter of Credit Application, you’ll find an example of
the Agreement from the reverse side of the application. This represents the Agreement between you and
Bank of America for the issuance of your letter of credit. Please read it carefully, and complete and sign in
accordance with the instructions on the Agreement itself.
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A Discussion of UCP 600
All commercial letters of credit should be issued subject to a set of rules established by the International Chamber
of Commerce, and known officially as “The Uniform Customs and Practice for Documentary Credits.” The
current version is referred to as UCP 600 and went into effect July 1, 2007. The following discussion is intended
to summarize and clarify the 39 articles that comprise UCP 600. Partial quotes and comments are given in this
chapter and should not be interpreted as a full summary. For a complete reading of UCP 600, as well as the URC
522 (“Uniform Rules for Collections”), please refer to the ICC publications, available for purchase on ICC’s Website
at www.iccbooksusa.com.
Art. 1 application of ucp
This article states that all letters of credit, including standbys, are issued subject toUCP 600, provided
that the LC specifically indicates this to be the case. Great care should be taken to avoid accepting credits
that are not issued subject to UCP 600. Please note that standby LCs can also be issued subject to another
set of rules issued by the International Chamber of Commerce, the ISP 98.
Art. 2 Definitions
This article gives 14 definitions relative to this publication.
Art. 3 interpretations
This article gives 12 interpretations to use within the framework of the rules.
Art. 4 credits vs. contracts
“A credit by its nature is a separate transaction from the sales or other contract on which it may be
based.”
•
This article makes a distinct difference between the credit itself and any underlying contract to which
the transaction is connected. Banks are not concerned with any underlying contracts, and an applicant
cannot prevent a bank from paying on a credit simply because the applicant asserts that the underlying
contract has been broken or not fulfilled.
•
There may be various contractual relationships which exist between banks or between the applicant
and the issuing bank. Beneficiaries may not avail themselves of such relationships (see Art. 5).
Art. 5 Documents vs. Goods/Services/performance
This article clarifies that banks deal only with documents, and not with goods, services or other
performances relative to those documents.
For example: A credit calls for shipment of “5 blade ceiling fans,” and the applicant (buyer) learns that
the beneficiary shipped “4 blade ceiling fans.” The applicant cannot instruct the bank to deny payment.
So long as the documents being submitted describe the goods as “5 blade ceiling fans,” the bank is
obligated to pay (assuming all other terms and conditions were complied with). Likewise, if a standby
credit contains a clause that requires the beneficiary to submit a statement certifying that “The applicant
is in default under their contract No. 1234 dated May 15, 2006,” then the applicant is precluded from
instructing the bank to deny payment simply on the basis that the applicant claims not to be in default.
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Art. 6
availability, expiry Date and place for presentation
“A credit must state the bank with which it is available or whether it is available with any bank.” This
article gives specific guidance on the various availability structures, expiry conditions and place for
presentation of documents. Properly structured, a credit will effectively tie these items to one another.
Art. 7
Bank undertaking
A credit is an obligation of the issuing bank to honor, provided that a complying presentation is made.
The article outlines the various scenarios which will engage the issuing bank’s obligation depending on
the availability of the credit.
Art. 8
Confirming Bank Undertaking
By adding its confirmation to a credit, a bank is obligated to honor provided that a complying
presentation is made. The article outlines the various scenarios which will engage the confirming bank’s
obligation depending on the availability of the credit.
Art. 9
advising
A credit may be advised to a beneficiary through another bank without engagement on the part of that
bank. This bank may act in the role of either an advising bank or as a confirming bank. The advising
bank’s responsibility is limited to taking reasonable care to ensure the authenticity of the credit and the
accuracy of the credit as it is passed to the beneficiary. If it is unable to verify authenticity, it must notify
the issuing bank right away. Should the advising bank choose to advise an unauthenticated credit, they
must so indicate this on their cover letter to the beneficiary. This responsibility on the part of an advising
bank is very important. Unfortunately, there have been numerous documented cases of bogus letters of
credit being issued, and then advised or confirmed by yet another bogus bank in the beneficiary’s country.
This is just one good reason to arrange for letters of credit to be advised/confirmed by the beneficiary’s
bank whenever possible.
Art. 10
amendments
A credit cannot be amended or cancelled without the agreement of the issuing bank, the confirming bank
(if any), and the beneficiary. The only minor exception is covered under transferable credits, Article . An
issuing bank is bound by any amendments as soon as it has issued them. A confirming bank is likewise
bound from the moment that it extends its confirmation to any amendment. However, a confirming bank
may decline to extend its confirmation to an amendment, and, if it does so, it must inform the issuing
bank and the beneficiary without delay. An amendment does not become effective until the beneficiary
accepts the amendment. Acceptance may be in writing. If the beneficiary does not accept the amendment
in writing but subsequently presents documents that conform to the credit and the not yet accepted
amendment, then the amendment is deemed accepted at that time. If the beneficiary wishes to reject the
amendment, rejection should be done in writing prior to presenting documents. If there is more than one
change covered in the same amendment advice, the beneficiary must accept or reject all changes in that
particular amendment.
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Art. 11
teletransmitted and pre-advised credits
Credits sent by an issuing bank to an advising bank via a teletransmission are considered the operative
instrument and no confirmation is expected to follow.
Art. 12
nomination
“An authorization to honor or negotiate does not impose any obligation on that nominated bank.” This
article describes the options of a bank who has been nominated to honor or negotiate. It is also the article
that authorizes a nominated bank that has accepted a draft or incurred a deferred payment undertaking
to prepay or purchase that undertaking from the beneficiary. Lastly, this article makes it clear that the
act of receiving, examining and forwarding documents does not constitute honor or negotiation.
Art. 13
Bank-to-Bank reimbursement arrangements
This article only applies to those credits which arrange for bank-to-bank reimbursement where the letter
of credit does NOT indicate that the reimbursement is subject to URR 525 (ICC Rules for Bank-to-Bank
Reimbursements).
•
When an issuing bank opens a letter of credit that is available with a bank other than itself, the issuing
bank will frequently indicate the name of a reimbursing bank. The issuing bank maintains an account
with the reimbursing bank and authorizes them to honor reimbursement claim(s) from the nominated
bank that has acted in accordance with its nomination under the credit. This article simply states that
the issuing bank must provide authorization instructions to the reimbursing bank in a timely manner.
The bank that requests reimbursement is called the claiming bank.
•
A claiming bank shall not be required to supply a certificate of compliance with the terms and
conditions to the reimbursing bank.
•
If the reimbursing bank fails to pay the claiming bank, then the issuing bank is still obligated to pay
the claiming bank provided that all terms and conditions of the credit have been complied with.
•
The issuing bank shall be responsible to the claiming bank for any loss of interest if reimbursement
is not provided by the reimbursing bank on first demand, or as otherwise specified in the credit or
mutually agreed, as the case may be.
•
The reimbursing bank’s charges are to be paid by the issuing bank unless specified for the account
of the beneficiary. If so specified, the reimbursing bank’s charges will be deducted from the payment
to the claiming bank. In the event that the credit is not drawn under the reimbursing bank, charges
remain for the account of the issuing bank.
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Art. 14
Standard for examination of Documents
This article gives exporters a clear idea of how banks will perform the examination of their documents
and sets a strong foundation for how to prepare complying documents. It deals with the following topics:
•
Banks must determine compliance on the basis of documents.
•
Each bank that has a specific duty in the LC (issuing bank, confirming bank, nominated bank that
is acting on its nomination) has a maximum of five banking days following the day of presentation to
examine the documents and determine compliance.
•
A presentation must be made no later than 21 days after the goods have been shipped, but in no case
later than the expiry date of the credit.
•
example: An LC is issued with an expiry date of Saturday, August 25, 2007, but does not stipulate a
latest shipping date. Documents could be presented as late as Monday, August 27, 2007; however, the
latest shipping date could be no later than Saturday, August 25, 2007.
Note: Sometimes documents are presented on or before the expiry date or latest day for presentation,
and are subsequently found to contain discrepancies. On occasion, the beneficiary must re-present
corrected documents. If the corrected documents are submitted after the expiry date or latest day for
presentation then a new discrepancy will exist of “LC expired” or “late presentation.” For this reason it
is highly advisable to present documents at least seven days prior to the expiry date of the credit.
•
The data content in any required document in the presentation must not conflict with data
•
The description of goods in documents other than the commercial invoice may be in general terms.
•
Except for the transport document, commercial invoice and insurance document (if any), unless the
credit stipulates otherwise, banks will accept documents as presented if the content appears to fulfill
the function of the required document.
•
Documents presented that are not required by the credit will be disregarded and likely will be returned
to the presenter.
•
If a credit speaks to a condition and does not indicate which document would contain information to
show compliance, that condition will be disregarded.
•
Information such as beneficiary and applicant addresses and contact details and the named shipper or
consignor on any document may vary from that shown in the credit.
Art. 15
complying presentation
This article describes the actions around negotiation, honor and forwarding of documents required of a
bank when a presentation is found to be in compliance.
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Art. 16
Discrepant Documents, Waiver and notice
This article describes the actions permitted or required of a bank when a presentation does not comply.
•
The bank may refuse to negotiate or honor.
•
The issuing bank may approach the applicant for waiver of discrepancies.
•
The bank deciding to refuse must give a single notice to the presenter, by expeditious means, by the
close of the 5th banking day after presentation that includes:
A statement of refusal
A listing of each discrepancy
A notice of how the documents will be handled
•
If the bank fails in any of these responsibilities they shall be precluded from claiming that the
documents do not comply.
Art. 17
original Document and copies
This article explains the issues around original vs. copy documents:
•
At least one(1) original of each document called for in a credit must be presented.
•
Guidelines are described regarding how to determine if a document is an original for the purposes of
these rules.
Art. 18
commercial invoice
This article describes the basic features of a compliant commercial invoice. It is important to note that
the requirement for merchandise description has a higher threshold for compliance than that for other
documents—“must correspond with that appearing in the credit.”
Art. 19
transport Document covering at least two Different modes of transport
This article describes the required characteristics for the transport document we often call the
multimodal or combined transport document. Here you will find information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
•
Terms of carriage
•
Transshipment information
Art. 20
Bill of lading
This article describes the basic required characteristics for the transport document often referred to
as a Marine or Ocean Bill of Lading (B/L) and that indicates a port-to-port shipment. Here you will find
information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
•
Terms of carriage
•
Transshipment information
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Art. 21
non-negotiable Sea Waybill
This article describes the basic required characteristics of the document often referred to by its shorter
name—sea waybill. This document must not be confused with the non-negotiable copy of a bill of lading or
multimodal transport document nor with a bill of lading or multimodal transport document that has been
issued in straight or non-negotiable form. In the article you will find information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
•
Terms of carriage
•
Transshipment information
Art. 22
charter party Bill of lading
This article describes the basic required characteristics of this private agreement transport document—
the bill of lading that is subject to a charter party contract. In the article you will find information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
Art. 23
transport Document
This article describes the basic required characteristics of the document often referred to as an air
waybill (AWB). In the article you will find information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
•
Terms of carriage
•
Transshipment information
Art. 24
road, rail or inland Waterway transport Document
This article describes several transport documents where, for the purposes of letters of credit, the basic
required characteristics are similar. You might see the documents referred to as (including but not
limited to):
•
Truck/ Road - Bill of Lading or Waybill
•
Rail Bill of Lading or Waybill
•
Barge Waybill
In this article you will find information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
•
Transshipment information
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Art. 25
Courier Receipt, Post Receipt or Certificate of Posting
This article describes the basic required characteristics for transport documents that indicate shipment
of goods by courier or postal services. In this article you will find information on:
•
Signature requirements
•
Shipment or dispatch information
•
Logistic information
Art. 26
“on Deck,” “Shipper’s load and count,” “Said by Shipper to contain” and charges additional to freight
This article describes certain wording that typically is found on transport documents and details how
banks will deal with this circumstance.
Art. 27
clean transport Document
This article provides a rule that says that bank will accept only clean transport documents and what
constitutes a transport document that is not clean. The word “clean” need not appear on the document.
Art. 28
insurance Document and coverage
Insurance documents come into play when the shipment requires the seller to provide proof that the
goods have been insured as they move from seller to buyer. This article gives an overview of what
basic requirements must be met when an insurance document is required and conditions for certain
characteristics.
•
Insurance document types
•
Signature requirements
•
Dates of coverage
•
Logistics covered
•
Value of coverage
•
Risks covered
•
Exclusions and deductibles
Art. 29
extension of expiry; last Date or Day for presentation
Control of the critical dates in a credit is one of responsibilities of the beneficiary that will help ensure
they retain the protection of the credit. This article gives the beneficiary the right tomake their
presentation on the banking day following the latest day for presentation, whether that is tied to a
shipping date or is actually the expiry date of the credit.
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Art. 30
tolerance in credit amount, Quantity and unit prices
This article provides for tools within the credit that create allowances often necessary with regard to
the details of amount, quantity and unit prices, while also providing for protection of unit prices where
necessary. This is a very useful article in helping credits adapt to the needs of the buyer and seller when
exact values are undetermined until goods are actually shipped.
allowances in credit amount, Quantity and unit price
•
Sometimes an LC will refer to the amount or the quantity as “about,” or “approximately.” When this
happens, the amount or quantity may be up to 10%more or less than the amount or quantity (including
unit prices) stated in the credit.
•
Banks will accept documents which show that the quantity of goods being shipped has a variance of
5%more or less than that stipulated in the credit unless it would cause the amount of the drawing to
exceed the available balance under the credit, or the credit states the quantity in terms of a stipulated
number of packing units.
example: LC calls for 5,000 gallons of orange juice valued at $100,000.Unless specifically prohibited in the
credit, banks will accept documents showing the amount of product within a range of 4,750 gallons up to
5,250 gallons. Note: The amount being drawn could be reduced to $95,000 (for 4,750 gallons), but could not
exceed $100,000 even though between 5,000 and 5,250 gallons were shipped.
example: LC calls for 5,000 cartons of orange juice. Banks will reject documents which indicate a
shipment of either less than or more than 5,000 cartons. (Exception: Banks will accept documents for less
than 5,000 cartons if the credit allows for partial shipments). UNLESS a credit stipulates otherwise, or
unless Article 30 (a) or (b) applies, banks will accept documents with an amount up to 5% less than the
amount of the credit. However, if the credit calls for a specific quantity or unit price, then the full quantity
must be shipped and the unit price must not be reduced.
example: LC calls for a shipment of 5,000 cartons of orange juice totaling $100,000. Partial shipments
are prohibited. Banks will accept documents totaling between $95,000 and $100,000 provided that the
invoices still indicate that 5,000 cartons have been shipped.
Art. 31
partial Drawings or Shipments
While the standard credit makes no restrictions around partial shipments and/or partial drawings,
credits can and often do restrict partial shipments and/or drawings. This article helps all parties
concerned understand what constitutes a partial shipment in order to control partial shipment
restrictions.
Art. 32
installment Drawings or Shipments
Some credits contain conditions for required installment drawings and/or shipments. This article tells us
that if any such installments are not drawn or shipped according to the time requirements in the credit,
the credit CEASES to be available for that and any further drawings.
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Art. 33
hours of presentation
Banks have no obligation to be available to take in presentations outside of normal business hours (see
Article 2 for definition of banking days).
Art. 34
Disclaimer on effectiveness of Documents
This article establishes that, while banks deal in documents only with regard to the transaction covered
by the LC, they do not have any responsibility to go outside of those documents to establish their
genuineness or accuracy or descriptions therein, etc.
Art. 35
Disclaimer on transmission and translation
This article establishes that banks are not responsible for consequences of loss in transit or mutilation of
documents arising out of transmission or delivery.
Art. 36
force majeure
This article relieves banks of responsibility for consequences arising during force majeure events.
Art. 37
Disclaimer for acts of an instructed party
This article covers a few separate issues related to the use of another bank’s services to complete the
work needed to process the letter of credit.
•
Banks often will utilize the services of another bank to effect instructions given by the applicant. This
is done so at the applicant’s risk.
•
Neither the issuing bank nor the advising bank assumes responsibility should instructions it transmits
to another bank not be fulfilled, even if the bank was at their choice.
•
A bank performing services at the request of an instructing bank is entitled to claim their charges
from the instructing bank; if the credit states that the charges are for account of the beneficiary and
these charges cannot be collected from them, the instructing bank remains liable for these charges.
Art. 38
transferable credits
A credit may be issued allowing for transfer by the issuing bank or by a bank nominated in the credit.
This article describes the governing rules for the transfer process.
•
A bank is not obligated to transfer even though the LC states it is transferable
•
Transferable credit is defined
•
Transferring bank is defined
•
Charges for transfer must be paid by the beneficiary
•
Transfer in whole or in part
•
How to handle amendments
•
More than one second beneficiary
•
Terms that may be changes as the transfer is made
•
Substitution of invoice and draft by the first beneficiary; failure to substitute when demanded
•
Second beneficiary presentation of documents must be made to the transferring bank
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Art. 39 assignment of proceeds
The beneficiary may instruct that the proceeds (some or all) of a credit be paid to another party. Local law
governs such transactions.
This paraphrased version of the UCP 600 is intended to summarize and clarify its articles only, and is not to be
construed as the entire document. Partial quotes are made in this section. Bank of America assumes no liability
for any misunderstanding arising from the use of this condensed version. For a complete reading of UCP 600, URC
522, ISP98 and ISBP, please refer to the ICC publications available for purchase on ICC’s Web site at http://www.
iccbooksusa.com.
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A Discussion of the eUCP
(Reference to UCP 500 can be carried over to UCP 600)
As an importer, you are probably aware that digital developments are shrinking the world and creating new
opportunities for your success in the global marketplace. New technologies can help increase cash flow, strengthen
supply chain relationships and streamline your trade activity.
With a basic understanding of these new guidelines for electronic document presentment (eUCP), you can start to
consider how digital developments will affect the future of your organization.
The International Chamber of Commerce’s rules governing documentary credits now include an electronic
supplement that caters to the growing number of documents that are presented electronically. The eUCP came into
force on March 31, 2002 and was updated in July 2007 to bring it current with the UCP 600. It is now titled eUCP 1.1.
The eUCP, several pages in length, covers items such as the relationship of the eUCP to UCP 600, electronic formats
for electronic documents, amendments, place of presentation and notice of dishonor and preclusion.
These new articles supplement the UCP 600 rules and in no way replace them; they are to be used in conjunction
with the UCP 600. The eUCP provisions shall prevail to the extent that they would produce a result different from
the application of the UCP 600.
Parties wishing to use the eUCP will specifically have to incorporate it into the credit. However, a credit subject to
the eUCP is also subject to the UCP without express incorporation of the UCP.
The eUCP contains a number of definitions of terms that have totally different meanings in the electronic and paper
based contexts. Terms such as “appears on its face,” “place for presentation,” and “sign”— all common features of
the UCP—are redefined to take an electronic environment into account. The full-text publication of the eUCP can be
ordered from the International Chamber of Commerce at http://www.iccbooksusa.com.
At Bank of America we constantly evaluate new technology and consider future partnerships. Our e-Solutions are
scalable, interoperable and are designed with the client in mind. Because we are not locked in to a single solution
and a single vendor, we can provide sound recommendations to help you manage increased volumes and complexity
and expand your global trade opportunities.
General statements from the eUCP Working Group ICC Banking Commission—March 2002
“The Working Group concluded that its task is to create a supplement to the UCP that will deal with the issues of
electronic presentation. The official name for the work is ‘UCP Supplement for Electronic Presentation.’ It uses the
acronym ‘eUCP.’ The eUCP provides definitions to allow current UCP terminology to accommodate the presentation
of the equivalent of paper documents electronically and to provide necessary rules to allow the UCP and the eUCP
to work together. The eUCP has been written to allow for presentation completely electronically or to allow for a
mixture of paper documents and electronic presentation. While practice in this area is evolving, the Working
Group believes that providing exclusively for electronic presentation is not entirely realistic, nor will it promote the
transition to total electronic presentation.
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The Working Group has not seen the need to address any issues relating to the issuance or advice of credits
electronically, since current market practice and theUCP have long allowed for credits to be issued and advised
electronically.
It is important for the reader of the eUCP to understand that many of the articles of the UCP are not affected by
the presentation of the electronic equivalent of paper documents and do not require any changes to accommodate
electronic presentation.
When read together, the UCP and the eUCP will provide the necessary rules to allow for electronic presentation and
are broad enough to allow for developing practice in this area. Where specific words or phrases used in the UCP
are defined in the eUCP, these definitions, unless otherwise stated, apply wherever the terms appear in the UCP.
The Working Group, in drafting the eUCP, has reviewed and considered definitions used in other ICC documents as
well as rules and regulations promulgated by governmental and international bodies. These definitions have been
used or partially used to the extent possible. Because the business is evolving, it is necessary in many cases to
modify these definitions or to create new definitions specifically to address the unique requirements related to the
presentation of the electronic equivalents of paper documents under the UCP.
The eUCP is specific to UCP 500 and, if necessary, may need to be revised as technologies develop, perhaps prior to
the next revision of the UCP. For that purpose, the eUCP is issued in version numbers that will allow for a revision
and subsequent version if the need arises. The eUCP has been specifically drafted to be independent of specific
technologies and developing electronic commerce systems. That is, it does not address specific technologies or
systems necessary to facilitate electronic presentation.
These technologies are evolving and it is left to the specific parties to agree on the technology or systems to be used
to provide for presentation of electronic records in compliance with the requirements of the eUCP.
The eUCP has been created to anticipate the needs of the market for the presentation of electronic documents.
The market, as it is developing, has created a higher standard in anticipation of increased processing efficiencies
when the electronic equivalents of paper documents are presented. In anticipation of this demand and to meet the
market expectation, several changes to the standards established by the UCP have been deemed necessary when an
entirely electronic presentation occurs. These changes are consistent with current practice and the expectations of
the marketplace. In order to avoid confusion between the articles of the UCP and the eUCP, the articles of the eUCP
are numbered with an ‘e’ preceding each article number.”
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S.W.I.F.T. Samples and Comments on Specific Fields
This sample is for illustration purposes only.
The letter of credit is presented in S.W.I.F.T. (Society for Worldwide Interbank Financial Telecommunication) format
which is commonly used by major international banks to transmit letters of credit and other messages. S.W.I.F.T.
messages are authenticated, between banks, by the exchange of an electronic key.
SAMPLE OF A LETTER OF CREDIT ISSUED BY BANk OF AMERICA
SENDER: BANK OF AMERICA
TRADE OPERATIONS CENTER
1000 WEST TEMPLE STREET
LOS ANGELES, CALIFORNIA 90012
RECEIVER:
BANQUE AVISANT
PARIS, FRANCE
SWIFT AUTHENTICATED MESSAGE
ISSUE OF DOCUMENTARY CREDIT (TYPE: 700)
:27: SEQUENCE OF TOTAL:
1/1
:40A: FORM OF DOCUMENTARY CREDIT:
IRREVOCABLE
:20: DOCUMENTARY CREDIT NUMBER:
123456
:31C: DATE OF ISSUE:
071024
:40E: APPLICABLE RULES:
UCPLV
:31D: DATE AND PLACE OF EXPIRY:
071130 LOS ANGELES, CA
:50: APPLICANT:
RANDALL COMPUTER, INC.
321 OAK STREET
LOS ANGELES, CALIFORNIA 90000
:59: BENEFICIARY:
PRODUITS ELECTRONIQUES S.A.
15 RUE GEORGES DUMAS PARIS 75009, FRANCE
:32B: CURRENCY CODE, AMOUNT:
USD 134,000.00
:41A: AVAILABLE WITH … BY … :
BANK OF AMERICA
TRADE OPERATIONS CENTER
1000 WEST TEMPLE STREET—7TH FLOOR
LOS ANGELES, CALIFORNIA 90012
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BY ACCEPTANCE
:42C: DRAFTS AT … :
90 DAYS SIGHT
FOR 100 PCT INVOICE VALUE
:42A: DRAWEE:
BANK OF AMERICA
LOS ANGELES, CALIFORNIA
:43P: PARTIAL SHIPMENTS:
PERMITTED
:43T: TRANSSHIPMENT:
PERMITTED
:44A: PLACE OF TAKING IN CHARGE/DISPATCH FROM/PLACE OF RECEIPT :
PARIS, FRANCE
:44E: PORT OF LOADING/AIRPORT OF DEPARTURE:
LE HAVRE, FRANCE
:44F: PORT OF DISCHARGE/AIRPORT OF DESTINATION:
LOS ANGELES, CALIFORNIA
:44B: PLACE OF FINAL DESTINATION/FOR TRANSPORTATION TO/PLACE OF DELIVERY:
FRESNO, CALIFORNIA
:44C: LATEST DATE OF SHIPMENT:
071120
:45A: DESCRIPTION OF GOODS AND/OR SERVICES:
COMPUTER EQUIPMENT ACCORDING TO P.O. NO. 87654
FCA PARIS, FRANCE
:46A: DOCUMENTS REQUIRED:
SIGNED COMMERCIAL INVOICE IN ORIGINAL AND TWO COPIES.
PACKING LIST IN ORIGINAL AND TWO COPIES.
FULL SET OF CLEAN MULTIMODAL TRANSPORT DOCUMENTS CONSIGNED TO THE ORDER
OF SHIPPER, BLANK ENDORSED, MARKED FREIGHT COLLECT AND NOTIFY BUYER.
:71B: CHARGES:
BANKING CHARGES ARE FOR ACCOUNT OF APPLICANT, EXCEPT FOR DOCUMENTARY
DISCREPANCY CHARGES, IF ANY, WHICH ARE FOR ACCOUNT OF BENEFICIARY.
:48: PERIOD FOR PRESENTATION:
DOCUMENTS MUST BE PRESENTED FOR PAYMENT, ACCEPTANCE / NEGOTIATION WITHIN
10 DAYS AFTER THE DATE OF SHIPMENT, BUT WITHIN THE VALIDITY OF THIS CREDIT.
:49: CONFIRMATION INSTRUCTIONS:
WITHOUT
:78: INSTRUCTIONS TO THE PAYING/ACCEPTING/NEGOTIATING BANK:
1) ALL DOCUMENTS MUST BE FORWARDED IN ONE MAILING, VIA COURIER OR EXPRESS
MAIL SERVICE, TO BANK OF AMERICA, TRADE OPERATIONS CENTER, 1000 WEST TEMPLE
STREET,
LOS ANGELES, CALIFORNIA 90012.
Bank of america merrill lynch SolutionS for importerS
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Import Letters of Credit Defined
:72:
SENDER TO RECEIVER INFORMATION:
PLEASE NOTIFY TO BENEFICIARY UNDER ADVICE TO US
ATTN: XYZ SMITH
PHONE: (012) 200—3000
FAX: (012) 200—4000
REGARDS
The preceding letter of credit example is provided for information and illustration only, and does not convey any
engagement or responsibility on the part of Bank of America. The names of the institutions used, except for
the name of Bank of America, and the transaction represented herein are fictitious. Any similarity with actual
institutions and transactions is unintentional and coincidental.
Comments on Specific Fields in Preceding Sample
SENDER: ISSUING BANk
This is the bank that issues the letter of credit (LC) at the request of their client, the buyer (applicant), in favor
of the seller (beneficiary). In the LC sample attached, the issuing bank is Bank of America.
RECEIVER: ADVISING BANk
This is the bank that receives the LC from the issuing bank. In the LC sample attached, “Banque Avisant” is
the bank that would receive the LC and, consequently, the advising bank. Letters of credit are normally sent by
the issuing bank to the beneficiary through an advising bank.
The advising bank has the means to verify the authenticity of the LC before forwarding it to the beneficiary.
However, the advising bank is not responsible for payment. The responsibility for payment rests with the
issuing bank.
40A: FORM OF DOCUMENTARY CREDIT
This field should read IRREVOCABLE. It means that the issuing bank cannot cancel the LC prior to its
expiration date (31D). Although a letter of credit can be issued as “Revocable,” it is rarely issued as such since
most beneficiaries would not accept a revocable LC.
40E: APPLICABLE RULES
This field describes the governing body of law to which the letter of credit is subject with the use of codes.
“UCPLV”, as shown in the example, indicates “UCP LATEST VERSION”.
31D: DATE AND PLACE OF EXPIRY
DATE—The expiry date should allow the beneficiary enough time to make the shipment, and present the
required documents (46A) to the bank where the LC is available (41A), before the LC expires.
PLACE—The place where the LC expires should be the same as the location of the bank where the LC is
available (41A). If the LC states that it is available “With Any Bank,” the expiry place would be the country of
the beneficiary. Both the place where the LC expires and the place where the LC is available to the beneficiary
should be where the beneficiary is located, or where it would be reasonably convenient for the beneficiary to
present documents. In the sample attached, the LC expires in Los Angeles, California.
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Import Letters of Credit Defined
50: APPLICANT
This is the party, usually the buyer, on whose behalf the LC is issued. In the sample attached, the applicant is
Randall Computer, Inc.
On an LC issued on your behalf, check to ensure that your name and address are correct. Any difference
between the information in the LC and the information in presented documents may be considered a
discrepancy.
59: BENEFICIARY
This is the party, usually the seller, in whose favor the LC is issued. In the sample attached, the beneficiary is
Produits Electroniques S.A.
32B: CURRENCY CODE, AMOUNT
The amount specified in the LC should be sufficient to cover the cost of the merchandise, plus any other
expenses to be incurred by the seller. The expenses may include freight, insurance, and other charges. In the
LC sample attached, the shipment is to bemade FCA Paris, France (44A). The costs to the seller extend only
to the point of “taking in charge” of the merchandise. With an FCA shipment, the buyer assumes the costs of
freight and insurance to destination. Besides specifying the amount of the LC, this field will also specify the
currency in which the LC is payable. In the sample attached, the LC has been issued inU.S. Dollars. If the LC
amount is stated in a foreign currency, you bear the risk of exchange rate fluctuations.
41A: AVAILABLE WITH . . . BY . . .
This field identifies the bank with which the credit is available (the place for presentation) and an indication of
how the credit is available.
With—The LC should name a specific bank where the presentation of the document under the letter of credit
must be made (46A). Alternatively, the LC may state that it is available “With Any Bank,” thus allowing the
beneficiary to present documents at any bank of their choice. For practical purposes, however, if the LC states
that it is available “With Any Bank,” the beneficiary would want to present documents at a bank that is
involved in the LC transaction, such as the advising bank. If the LC is restricted to the issuing bank, or names
a bank outside of the beneficiary’s area as the bank where the LC is available, payment may be delayed. In the
sample attached, the LC is available to the beneficiary with Bank of America, Los Angeles, California.
By—All LCs must clearly indicate whether they are available by sight payment, by deferred payment, by
acceptance, or by negotiation. In the sample attached, the LC is available by acceptance because it requires the
beneficiary to present a time draft, payable at 90-days sight (42C). After the beneficiary presents the draft and
required documents to Bank of America, and Bank of America has determined that the draft and documents
are in compliance with the terms of the LC, Bank of America would accept to pay the beneficiary 90 days later.
Hence, the LC is available by acceptance.
42C: DRAFTS AT . . .
A draft is the document that represents the demand for payment that the beneficiary makes under the LC. A
draft may be payable at sight, meaning at the time when it is presented for payment, or it may be payable at
some future time after being presented for payment. In the sample attached, the LC requires drafts payable
at 90 days sight. The time when payment is to be made to the beneficiary is usually determined between
buyer and seller. If the seller gives payment terms to the buyer, or if the buyer requires bank financing of the
merchandise, the LC would require the beneficiary to present a time draft. For further information on drafts,
please refer to the section “Banker’s Acceptances” in the accompanying material.
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Import Letters of Credit Defined
NOTE: The issuing bank may not always require presentation of a draft. If payment under the LC is to be made
at some future time, and no draft is required, the LC is referred to as a “Deferred Payment Letter of Credit.”
Under this type of LC, since no draft is required, the beneficiary does not have the option of having a draft
discounted, that is, of obtaining payment prior to maturity at an advantageous interest rate.
42A: DRAWEE
This is the bank on whom the beneficiary is instructed to draw the drafts. An LC may require the beneficiary to
draw drafts on the issuing bank, on the advising or confirming bank, or on the reimbursing bank (53A). In the
sample attached, the LC requires drafts to be drawn on Bank of America, Los Angeles, California, the issuing
bank.
43P: PARTIAL SHIPMENTS
Partial shipments may or may not be permitted, or may be permitted within a stated schedule. The beneficiary
should make sure that he can meet the shipping requirements.
43T: TRANSSHIPMENT
This term means that the merchandise is loaded and reloaded from one carrier to another during the course
of carriage. When a shipment is made by air or by combined transport, transshipment should be permitted. In
the LC sample attached, transshipment is permitted.
:44A: PLACE OF TAkING IN CHARGE/DISPATCH FROM/PLACE OF RECEIPT :
This field is commonly used when a multimodal bill of lading is required. It describes the inland point of taking
in charge, dispatch from or initial place of receipt of the merchandise, for onward travel.
:44E: PORT OF LOADING/AIRPORT OF DEPARTURE:
This field describes the port of loading or airport of departure of the merchandise shipment.
:44F: PORT OF DISCHARGE/AIRPORT OF DESTINATION:
This field describes the port of discharge or airport of destination of the merchandise shipment.
:44B: PLACE OF FINAL DESTINATION/FOR TRANSPORTATION TO/PLACE OF DELIVERY:
This field is commonly used when a multimodal bill of lading is required. It describes the inland place of
final destination or place of delivery of the merchandise. General comments about fields 44A, 44E, 44F and
44B: depending on the type of transport document required under a letter of credit and the shipment terms
(Incoterms), either all or some of these fields may be included in the S.W.I.F.T. 700 message.
44C: LATEST DATE OF SHIPMENT
Dates are very important in the LC. The latest date of shipment specified in this field should allow enough time
for the beneficiary to be able to meet the shipment deadline.
45A: DESCRIPTION OF GOODS AND/OR SERVICES
The merchandise description in the LC must be brief. Specific details can be included in the purchase order
or sales contract, but have no place in the LC. If an LC contains excessive details in the description of the
merchandise, or in the terms of the LC, the advising bank may decline to advise it. Also, complex details in
the LC can result in documentary discrepancies. Since the issuing bank could not pay against discrepant
documents, the buyer would have the option to refuse payment. Documents presented under an LC containing
excessive details may be sent to the issuing bank as presented without review by the bank where the
documents are presented. The price basis is usually stated in this field and should be correct. Whether the
Bank of america merrill lynch SolutionS for importerS
Chapter 03
Import Letters of Credit Defined
shipment is to be made FOB port of departure or CIF port of destination, or under any other basis, the price
basis stated in the LC should be according to the trade terms specified in the International Chamber of
Commerce Publication No. 560, “Incoterms 2000.” Also, the price basis should be reflected in the documentary
requirements. In the LC sample attached, the price basis has been stated as “FCA Paris, France.” Accordingly,
under Field 46A, the transport document is to be marked “Freight Collect” and no insurance document is
required.
Use of an incorrect price basis, not in conformity with “Incoterms 2000,”may result in misunderstandings
between buyer and seller and a possible delay in payment. For a complete set of the international rules covering
trade terms, please refer to the International Chamber of Commerce Publication No. 560, “Incoterms 2000.” A
copy can be ordered via the internet at www.iccbooksusa.com.
46A: DOCUMENTS REQUIRED
The documents required for payment should be kept to a minimum. When presented, the documents must be in
strict compliance with the LC terms.
48: PERIOD FOR PRESENTATION
The number of days allowed for presentation of documents after the shipment is made should allow enough
time for the beneficiary to receive shipping documents from the carrier or the freight forwarder, and present all
documents to the bank where the LC is available, within the validity of the LC. The number of days allowed for
presentation of documents should be the difference in the number of days between the latest date of shipment
(44C) and the expiry date (31D). In the LC sample attached, the latest date for shipment is November 20 and the
expiry date is November 30. Consequently, the number of days allowed for presentation of documents is 10 days.
If a letter of credit does not contain a reference to the number of days allowed for presentation of documents,
the number of days allowed for presentation defaults to 21 days, per UCP 600, Article 14C.
49: CONFIRMATION INSTRUCTIONS
This field indicates whether or not the issuing bank is requesting the advising bank to confirm the LC. The
advising bank would only consider confirming an LC at the request of the issuing bank. The beneficiary may
ormay not require confirmation of an LC. It would depend on the strength of the issuing bank, the country
where the issuing bank is located, and the amount of the transaction. If the seller requires confirmation of the
LC, the buyer, in turn, will have to inform the issuing bank, so that the issuing bank will request the advising
bank to confirm the LC. If the advising bank agrees to confirm it, the LC would carry the engagement of the
advising bank, in addition to the engagement of the issuing bank. When the LC is sent to the beneficiary, the
advising bank would notify them if it has confirmed the LC.
78: INSTRUCTIONS TO THE PAYING/ACCEPTING/NEGOTIATING BANk
This field is commonly used for the issuing bank to provide instructions concerning the mailing of documents.
When used to indicate pre-notification of a reimbursement claim, or that pre-debit notification to the issuance
bank is required, the number and type (i.e. banking or calendar) of days within which the issuing bank has to
be notified should also be indicated.
Bank of america merrill lynch SolutionS for importerS
063Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 04
Purchase Order-to-Pay Service
063Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 04
Purchase Order-to-Pay Service
Chapter 04
Purchase Order-to-Pay Service
For the past 10 to 15 years, importers have invested large sums of money to improve the efficiency of their physical
supply chains, moving goods across borders with increased speed and lower costs to meet the demands of an
increasingly competitive marketplace. In many instances, the benefits of an efficient physical supply chain have
fallen short of expectations because of the failure to link the movement of goods with the movement of money, or
with the financial supply chain.
Bank of America is committed to developing solutions to assist you in optimizing and integrating your supply
chains. Our Purchase Order-to-Pay Service can help reengineer your trading processes and unlock substantial
amounts of working capital for you.
The Purchase Order-to-Pay (POto Pay) Service is a supply chain finance solution, which links the buyer’s supply
chain partners into an end-to-end payment and settlement process for increased transparency and visibility
throughout the supply chain. The service replaces paper-based functions with electronic processes and broadens
settlement options by offering open account payments as well as traditional letters of credit.
Through PO to Pay Service, buyers can electronically submit to Bank of America purchase order information that
is used to construct letter of credit (LC) and open account payment instruments for delivery to sellers in paper form
or via an electronic channel, including Bank of America Direct® Trade Services and EDI. The service includes a
matching engine, the Purchase Order Processing System (POPS), which reconciles purchase order data submitted
by buyers with invoice data submitted by sellers prior to payment.
Buyers can also upload a PO file with all of their suppliers’ PO details to automatically create their LCs and/or OA
transactions based on supplier terms and business rules, which streamlines buyers’ processing steps in their daily
work flow.
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Chapter 04
Purchase Order-to-Pay Service
Benefits of Purchase Order-to-Pay (PO to Pay)
Our PO to Pay service offers you several benefits:
• Simplified payment process—Importers no longer have to manage reconciliation of purchase orders to invoice,
packing lists and other shipping documents manually. PO to Pay eliminates these time-consuming tasks
by automating your cross-border trade payment process using business-matching rules. It can also handle
multiple payment terms and can be integrated with major purchase order and ERP systems that you use today.
• more certainty and assurance of payment—For exporters, the major disadvantage of moving to open account
terms is that you lose the payment guarantee offered by letters of credit. With the PO to Pay payment
assurance option, subject to credit line availability, your exporters are assured as long as compliant documents
are presented to Bank of America.
• Flexible financing—Another concern of exporters who are considering the move to open account is the
availability of financing in the absence of a letter of credit. Upon request, your exporters have the ability
to receive pre- and post-shipment financing against qualified open account transactions, subject to credit
availability.
• enhanced security and control—Security is a major concern when transmitting financial data electronically. To
help you maintain the integrity of your documents, all Web-based services offered by Bank of America have
rigorous security standards, including browsers with 128-bit encryption, server-side digital certificates, fire
walls and user access controls.
How PO to Pay works
The importer transmits or uploads a file of purchase orders to Bank of America. Files can be accepted in a variety
of formats and can be sent through various electronic channels (Internet or VAN). In the transmitted file, the
payment type for each transaction is flagged as either “letter of credit” or “open account.” Purchase orders are
housed in an electronic database at Bank of America, establishing the conditions a vendor must meet to receive
payment.
If the transaction is flagged for settlement by letter of credit, purchase order detail is used to issue a traditional
letter of credit to the beneficiary. Both letter of credit and open account transactions are available electronically
to all trading partners who have been granted access to Bank of America Direct® Trade Services, our Web-based
trade management system.
Data matching and payment feature—As goods are manufactured and shipped, vendors present documents to Bank of
America for payment. Presentations may be in paper or electronic form or a combination of both. Key data elements
in the seller’s documents are matched with purchase order data, using an automated mapping engine for electronic
presentations or document checkers for paper presentations. If conditions match, payment is made immediately
for a letter of credit or open account with the “auto-pay” feature. Payment for all other open account payment types
is made immediately after the importer has given approval. If the matching process fails, discrepancy details are
transmitted to the importer for resolution. Once payment is triggered, details can be sent electronically to both the
importer and vendor.
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Chapter 04
Purchase Order-to-Pay Service
Open account payment types
The PO to Pay platform supports three open account payment types:
• Buyer approved, no conditions matching—The purchase orders contain instructions to present documents to
Bank of America. When presented, we convert paper documents into a previously agreed-upon electronic
format that can be processed automatically by the importer or viewed online via Bank of America Direct®
Trade Services. The importer matches details to underlying purchase orders and can either approve or reject
the transaction for payment. Buyers do not have to submit purchase orders to Bank of America.
• Buyer approved, with conditions matching—The purchase orders are sent to both the seller and Bank of America
or only to Bank of America with instructions to advise the open account instrument with purchase order
details to the vendor. As export documents are received, Bank of America matches shipment data with
purchase order data in accordance with parameters established by the importer. Both compliant and noncompliant
presentations are transmitted to the importer for approval to pay.
• Bank approved, with conditions matching (auto-pay)—This option is similar to the “buyer approved” option, except
Bank of America automatically pays against transactions where data matches within agreed tolerance limits
and based on the availability of funds (straight-through processing). If a match is not established, discrepancy
details are transmitted to the importer to be resolved with the seller prior to payment.
No matter what option the buyer chooses, Bank of America provides the status of their payments and
comprehensive management reports.
It pays to have PO to Pay
With Bank of America PO to Pay, you improve communication and data exchange with your trading partners and
move one step closer to a seamless process that fully synchronizes the movement of goods with the exchange of
trading documents, financial data and funds.
Call your Global Trade & Supply Chain Solutions representative today to obtain more information about the
advantages of our PO-to-Pay Service.
Bank of america merrill lynch SolutionS for importerS
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Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of
Credit Documents
067Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of
Credit Documents
Chapter 05
A Closer Look at Letter of Credit Documents
What Are Some of the Typical Documents Required in a
Letter of Credit?
Some of the more commonly required documents include:
Commercial Invoice (see Exhibit A)
The invoice is a record of the transactions between seller and buyer. It is a request for payment. It is also important
to any third party who has an interest in or right to determine the value of a shipment, such as the bank that is
asked to discount a draft or the underwriter who is requested to insure the goods. While in some countries the
commercial invoice is sufficient for customs purposes, generally a consular invoice or a certificate of origin must
be produced for appraisement and entry of goods. When countries accept the commercial invoice as a basis for
customs appraisal, they may insist that the description of the goods on the commercial invoice fit the corresponding
category or description of their active customs tariff. A number of countries make the sending of the commercial
invoice obligatory and require an oath to be signed at the foot of the paper stating that the values shown are
entirely in accordance with the facts.
The commercial invoice generally gives terms, price, and all details necessary for the proper description of the
merchandise as well as the gross amounts and net amounts due. The invoice should be numbered, show the date
when it is prepared and the address of the shipper. The price information may include the net unit or total price,
and all charges connected with the shipment, including such commissions as may have been agreed upon. In the
case of a draft, the interest of the draft could be added, being computed in advance on the basis of the terms of
the draft (sight, 30 days, 60 days, and so forth), plus the time it will take for the draft to reach the destination.
Other components of the invoice could include: marks and numbers, quantities, number of packages, weights and
measurements, tare (when necessary), packed and unpacked, the date of shipment, fax number, and telephone
numbers of the seller and/or buyer, per unit, gross costs, etc.
Bank commissions and all other charges should also be added to the commercial invoice if the buyer has to pay for
them. In cases where the buyer pays for freight, insurance or any other items, these should be added, just the same
as consular fees, cartage, lighterage, telecommunication fees, customs fees, and any fees for certificates (such as of
health or analysis), provided that the sale makes the buyer liable for any or all of them.
Certificate of Origin (See Exhibit B)
A certificate of origin certifies that goods were mined, manufactured or assembled within a certain country. A
number of countries have apportioned space on the consular invoice to show the country of origin of each item on
the invoice, obviating the necessity for a separate certificate. The reasons for requiring such a certificate vary. It is
demanded and needed by governments or countries whose tariff laws favor certain countries, or which have made
agreements with certain countries, to determine such favored tariff rates. These favorable tariff laws necessitate
(for goods brought in from favored countries) a certificate of the actual origin of the articles imported and of the
fact that they come from the country or countries enjoying such special tariff privileges or favors.
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Chapter 05
A Closer Look at Letter of Credit Documents
The certificate, known as the certificate of origin, therefore enables the importing country to determine, through
its customs officers and administration, which shipments or goods shall benefit by such preferences. It contains
generally the same information as the consular invoice. This certificate is then presented by the importer to
customs officials to show the origin of the goods so that special preferential tariff rates, discounts from regular
tariff rates, or other deductions granted in agreements existing between the countries of buyer and seller, or favors,
can be taken into consideration.
Consular Invoice
These invoices may be required by various countries for customs or for statistical or other reasons. They must
contain full details and description of the shipment, to be used as evidence of the shipper’s owner’s declaration
of the value of the shipment. They are certified by the consul of the country to which the shipment is destined,
and generally include a sworn statement not only as to the truth of the declarations made, but also as to the
nonexistence of any other invoice for the same shipment. The consular invoice must show all details of the goods
themselves, as well as all discounts, rebates, or the like. The consular certificate or invoice facilitates customs work
at destination as well as collection of taxes, and also serves for statistical purposes.
The number of copies of the consular invoice which must be presented when a visa is requested will vary
considerably with the country and the set-up of its consular and customs offices. The consul always keeps certain
copies, partly for his or her own files and partly to be forwarded to the customs officers in the place of destination.
The number that are retained depend upon the country. The copies which the consul returns to the shipper are for
the exporter to forward to the importer for presentation to customs when the exporter declares the goods. They
should arrive as close to the arrival time of the goods as possible (preferably not later than the shipment). Delay in
receipt of documents is frequently penalized heavily by the customs department of the importing country.
Generally the consular invoice is a copy of the commercial invoice in the language of the importing country, supplied
in two to ten copies, which gives full details of the merchandise shipped (see above). The invoice must show also, in
addition to information about the materials or merchandise, the name and nationality of the vessel that carries the
cargo, the port of shipment, and the port or point of destination.
Inspection Certificate
An inspection certificate testifies to the inspection of exported or imported goods. If it is needed, this documentary
requirement should be clearly stated in quotation and sales contracts. In regard to many staple commodities sold
against letters of credit, on grade designation entirely, such as raw cotton, the buyer provides for inspection or
warehouse certification of the goods before shipment to avoid loss due to deviation from standard grade. Inspection
before shipment is also provided in many sales contracts on expensive machinery or equipment. An inspection from
an independent third party may be requested under a letter of credit.
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Chapter 05
A Closer Look at Letter of Credit Documents
Insurance Policy or Certificate (see Exhibit C)
An insurance policy or certificate should be required for presentment under a letter of credit if the arrangement
between buyer and seller indicates that the seller should purchase the insurance. Cargo Insurance serves to protect
the shipment of merchandise against loss or damage during transit.
Whether or not the buyer or seller is required to purchase insurance for shipped merchandise depends upon
the type of transaction specified in the contract or purchase order. For example, if the seller is contracted to
deliver merchandise to the buyer FOB (Free On Board), then the buyer/importer is responsible for insuring the
goods against risks while in transit. See Chapter 9 of this guide for an in-depth explanation of all shipping terms
(Incoterms) and insurance responsibility under each term. Carrier and shipping firms are not required to provide
insurance for cargo they are instructed to deliver.
Seeking insurance for merchandise is a straightforward process that many merchant insurance firms and
freight forwarders will provide. Regular importers frequently use an open cargo policy that provides coverage
from warehouse to warehouse, depending upon the terms. This provides automatic coverage for the merchandise
throughout the shipping process.
These policies usually provide all risk, in addition to warehouse to warehouse coverage, and similar coverage for
airfreight and parcel post shipments. Policies for one-time shipments are also available. These are often used
by infrequent importers, who arrange these policies with their freight forwarders. With few exceptions (bulk
agricultural products and hazardous materials), it is usually preferable for importers to use only warehouse to
warehouse or door to door insurance policies for whatever risks are being covered. This assures that all transit
points are covered.
Insurance costs vary according to the extent of coverage, the risks specified, and any additional coverage requested
by the purchaser. Typical coverage for a policy is 110 percent of the CIF (Cost Insurance and Freight) value. This is a
common level of coverage, since it is the default level of coverage according to UCP 600.
Packing/Weight List (see Exhibit D and E)
The list which shows, item by item, the contents of cases or containers with each item listed separately, and its
weight and description set forth so as to permit checks by customs on arrival, as well as by the recipient of the
goods. It must be accurate and must satisfy both buyer and customs.
Bill of Lading (see Exhibits F)
The bill of lading is the receipt for the goods received by or loaded on a carrier and the contract between the
shipper and the carrier. The contract stipulates where the goods are to be delivered, the freight charges to be
paid, when and by whom. This receipt for the merchandise, therefore, whether issued by a steamship company or
by other carrier (railway, air carrier, and so forth), represents a definite agreement between shipper and carrier.
The conditions of the bills of lading are not uniform and depend upon the nature of the carrier, the conditions and
usages at port of shipment or destination, and other individual factors and requirements. The bill of lading may
also convey title to the goods to which it refers and can be used to transfer such ownership of the goods with certain
exceptions.
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
For all these reasons, the carrier or its agent generally will refuse to deliver the goods covered by a negotiable bill
of lading without the bill being produced, duly signed or endorsed. Customs considers the holder of a duly signed or
endorsed bill of lading to be the owner of all merchandise on such bill of lading issued by a common carrier. The bill
itself is regarded as constituting the best evidence of the right to make entry. Some countries require legalization
of the bill of lading by their consul at the place or port of shipment to give official proof of the accuracy of the bill as
regards to the origin, quantity, and mode of shipment of the merchandise.
Ocean Bill of Lading
An ocean bill of lading is a receipt for the goods delivered to or on board a vessel, specifying the conditions and
terms of carriage, the character of the goods shipped, and their weights, measurements, and destinations, as well
as the person to whom the goods are consigned or who is to be notified of their arrival. The bill of lading does not
convey title to the goods until it is properly endorsed. It is created by the shipper and must be based on the dock
receipt that the steamship line issues on receiving the cargo at the pier, the dock receipt being exchanged for the
bill of lading.
Usually, three bills of lading are signed, although the various shippers may ask for more unsigned (and therefore
not negotiable) copies for different purposes and uses in their offices. For shipments going to certain countries, it is
necessary to present the bill of lading for customs along with the other documents; otherwise, it will not be usable at
the destination.
Ocean bills of lading are issued as straight bills of lading and order bills of lading. The former is a non-negotiable
document by which the transportation company acknowledges receipt of cargo and contracts to move it. It is
not always necessary to surrender the original copy for delivery of cargo. The order bill of lading is a negotiable
document acknowledging receipt of cargo and contracting to move it. Surrender of the original properly endorsed
B/L is required on delivery of the cargo. The ocean bills f lading are of two classes, “received for shipment” and
“shipped” or “on board.” The former is issued for a named steamer in which space has been previously reserved and
goods are in the possession of the steamship company; the latter is issued only after the goods have been loaded on
the vessel. Banks often require “on board” bills of lading when issuing a letter of credit.
The ocean bill of lading is not only the final receipt from the carrier, but is a contract between the carrier and
shipper. It may be used as a negotiable document. Drafts or bills of exchange to which are attached the shipper’s
invoice, ocean bill of lading, and insurance policy constitute methods commonly used in making foreign-trade
financial settlement. The freight charges generally must be paid before the steamship company surrenders the
cargo.
Straight Bill of Lading
A straight bill of lading is a bill of lading made out to a named consignee. It is not negotiable and is therefore issued
for shipments to a specified person.
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Bill of Lading to Order
This is a bill of lading made out to the order of, and endorsed by, the shipper either in blank or to a named
consignee. The purpose of this type of bill of lading is to protect the shipper against buyers obtaining possession of
the goods before they have paid or accepted the relative draft. A steamship company will not deliver goods covered
by a “to order” bill until ownership is proven by presenting the original endorsed bill. However, problems exist in
connection with “to order” bills of lading for Latin American countries, where delivery of incoming cargo is the
function of the customs authorities and is not entrusted to steamship lines or their agents. The laws of a few Latin
American countries prohibit “to order” bills of lading, and in some other Latin American countries, these bills are
not accorded the same protection as in Europe and the United States.
Important Note: In shipping parlance, a distinction is made between a bill of lading made out to the order of the
shipper and a bill made out to the order of the buyer. The latter bill does not give shippers as much protection as a
bill drawn to their own order. As a rule, when a bill of lading is to the order of a buyer, the buyer can get the goods
from a steamship line without presenting the bill of lading by posting a bond.
Negotiable Bill of Lading
When an order bill of lading is endorsed in blank, it becomes negotiable and the carrier will deliver the goods
to whoever presents the endorsed bill of lading. While all original bills of lading (full set) are negotiable, one
is sufficient to obtain goods. On the other hand, if bills are drawn to order of the consignee, the consignee’s
endorsement makes it negotiable. If they are drawn to order of the shipper, the shipper must endorse it before it
can be transferred and, therefore, before the goods it represents can be conveyed to a third party. The endorsement
itself can be made to a specific third person or firm, a bank, or in blank; while one endorsed copy is sufficient,
the full set of originals should be endorsed. In addition to the original endorsed bills of lading, remaining copies
generally are kept by the shipper and carrier for their records.
Original Bill of Lading
This is the original bill of lading, which is negotiable, provided that it is a “to order” bill. Generally three such
“originals” are issued, known as a “full set,” with the carrier marking the total number of the originals on each
original issued. When negotiating the originals, the bank will require the full set, although one of them, properly
endorsed, is sufficient to obtain the goods. If delivery is made against one of the bills of lading, the others are
thereby automatically rendered void (see “Bill of Lading” on p.70).
Full Set Bill of Lading
When more than one negotiable bill of lading is issued, the number of such total issued is marked on each
individual document, and the banks generally insist on receiving the total number of bills issued, or the “full set.”
Extra copies generally are kept by the steamship company and shipper (see Bill of Lading on p.70).
Foul Bill of Lading Versus Clean
A bill of lading is called foul when, contrary to the clean bill of lading, it shows by marginal notes, rider, or otherwise
that all or part of the shipment to which it refers is in bad condition or damaged.
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Multi-Modal Transport Document
This is a bill of lading covering shipment on one and the same (straight or to order) bill of lading from point of
shipment to port or point of destination, involving transportation by more than one carrier. It is also the term used
for a bill of lading issued by a steamer from port of shipment to either an out port or to a point inland in the country
of destination, including any transshipment or land carriage necessary to make such delivery.
Air Waybill
An Air Waybill is similar to an ocean bill of lading, except that it is restricted to shipment by airfreight. A major
difference between the two is that the air waybill is always non-negotiable. It is the contract between the shipper
and the airfreight carrier, limited to the conditions stated on the air waybill such as the destination and recipient.
An air waybill is normally issued in one original, with several copies.
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit A Sample Copy Only
BENEFICIARY:
DEMO
BENEFICIARYCO.
DEMO
STREET
DEMO
CITY
HONG
KONG,
HONG
KONG
COMMERCIAL
INVOICE
Date:
10
Jan
2007
Invoice
No:
B/LNo:
Vessel:
Shipped
from:
JAKARTA,
INDONESIA
Shipped
To:
SAN
DIEGO,
USA
SOLD
TO:
BUYERS
INTERNATIONAL
315
PTATANGO
MANGO
BULILIMAH
KTABOROON,
CA11203
Letter
of
Credit
No:
M1241204NS00178
Issued
By:
IMPORTER’S
ISSUING
BANK
NAME
Additional
Information
(for
this
shipment
only)
MERCHANDISE
DESCRIPTION:
LADIES BLOUSES AS PER PO. NO. 12345 LADIES
BLOUSESAS
PER
PO.
NO.
12345
ITEM:
QUANTITY:
PRICE:
Invoice
Total:
10,000.00
(USD)
Authorized
Signature:
Name:
Title:
Certification
Statement
If
Required:
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit B Sample Copy Only
CERTIFICATE
OF
ORIGIN
EXPORTER:
DEMO
BENEFICIARYCO.
DEMO
STREET
DEMO
CITY
HONG
KONG,
HONG
KONG
DATE:
10
Jan
2007
OTHER
REFERENCES:
LC
NO:
M1241204NS00178
SALES
ORDER:
INVOICE
NO:
B/LNO:
SOLD
TO:
BUYERS
INTERNATIONAL
315
PTATANGO
MANGO
BULILIMAH
KTABOROON,
CA11203
COUNTRY
OF
ORIGIN
OF
GOODS:
CONSIGNEE:
MIZUHO
BANK
NOTIFY:
AIRPORTS AUTHORITY
JAKARTA, KASAFDARJUNG
AIRPORT, JAKARTA
AIRPORTSAUTHORITYINDONESIA
INDONESIAINDONESIA
JAKARTA,
KASAFDARJUNG
AIRPORT,
JAKARTA
REMARKS:
WE CERTIFY THE ORIGIN OF THE
GOODS IS THE Y OF INDONESIA.
WE
CERTIFYTHA
THATHA
T
TT
THE
ORIGIN
OFTHE
GOODS
ISTHE
COUNTR
COUNTRCOUNTR
Y
OF
INDONESIA
COVERING:
LADIES BLOUSES AS PER PO.NO.LADIES
BLOUSESAS
PER
PO.
NO.
12345
1234512345
ITEM
NO:
DESCRIPTION:
ORIGIN:
QUANITY:
THE
UNDERSIGNED
HEREBYDECLARE
THATTHEABOVE
DETAILSAND
STATEMENTSARE
CORRECT
AUTHORIZED
SIGNATURE:PLACE
AND
DATE:
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit C Sample Copy Only
ARCH
INSURANCE
COMPANY
A
Missouri
Corporation
Home
Office:
3100
Broadway,
Suite
511,
Kansas
City,
MO
64111
Administrative
Office:
One
Liberty
Plaza,
53rd
Floor,
New
York,
NY
10006
Tel:
800-817-3252
Certificate
of
Insurance
ORIGINAL
THIS
CERTIFICATE
REQUIRES
ENDORESEMENT
IN
THE
EVENT
OF
ASSIGNMENT
Broker:
Global
Solutions
Insurance
Services,
Inc.
Redondo
Beach,
CA90278
ASSURED
POLICY
NO.
71-OCP1597700
CERTIFICATE
OF
INSURANCE
NO.
71-1710
EXPORT
REFERENCES
UTLIMATE
CONSIGNEE
and
INSURED
DESTINATION
FORWARDED
AGENT
/
REFERENCES
POINT
AND
COUNTRY
OF
ORIGIN
CA U.S.A
NOTIFY
PARTY
(not
applicable
to
insurance
certificate)
DOMESTIC
ROUTING/EXPORT
INSTRUCTIONS
(not
applicable
to
insurance
certificate)
PIER
OR
AIRPORT
LOS ANGELES, CA U.S. PORT
EXPORTING
CARRIER
PRESIDENT TRUMAN 164
PORT
OF
LOADING
LOS ANGELES, CA U.S.
ONWARD
INLAND
ROUTING
PORT
AIR/SEA
PORT
OF
EXCHANGE
NAHA, OKINAWA, JAPAN
FOR
TRANSHIPMENT
TO
PARTICULARS
FURNISHED
BY
SHIPPER
MARKS
AND
NUMBERS
NO.
OF
PKGS
DESCRIPTION
OF
PACKAGES
AND
GOODS
&
SPECIAL
INS
CONDITIONS
GROSS
WEIGHT
MEASUREMENTS
124
1x40HC SLAC:
PKGS
DESCRIPTION OF GOODS AND/SERVICES
CONSTRUCTION MATERIALS AND EQUIPMENT
CIF NAHA, OKINAWA, JAPAN
L/C:
110 PERCENT OF THE INVOICE VALUE INCLUDING ICARGO CLAUSES (ALL RISKS).
INSURANCE CLAIMS TO BE PAYABLE IN JAPAN IN COF DRAFTS.
NU1420.00L
6428.29K
STITUTE
RRENCY
2170.000F
61.454M
B/L
DATE
INSURED
VALUE
$
AMOUNT
IN
WORDS
DOLLARS
CONDITIONS
OF
INSURANCE
ON
REVERSE
SIDE
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit D Sample Copy Only
BENEFICIARY:
DEMO
BENEFICIARYCO.
DEMO
STREET
DEMO
CITY
HONG
KONG,
HONG
KONG
WEIGHT
LIST
Date:
Jan
SOLD
TO:
BUYERS
INTERNATIONAL
315
PTATANGO
MANGO
BULILIMAH
KTABOROON,
CA11203
10
1010
JAN
2007
20072007
Invoice
No:
S.O.
No:
SHIPTO:
BUYERS
INTERNATIONAL
315
PTATANGO
MANGO
BULILIMAH
KTABOROON,
CA11203
Letter
of
Credit
No:
M1241204NS00178
Drawn
Under:
IMPORTER’S
ISSUING
BANK
NAME
NOTIFY:
AIRPORTS AUHTORITY INDONESIA
JAKARTA, KASAFDARJUNG
AIRPORT, JAKARTA
MERCHANDISE
DESCRIPTION:
LADIES BLOUSES AS PER PO. NO. 12345LADIES
BLOUSESAS
PER
P.O.
NO.
12345
ITEM:
NETWEIGHT:
GROSS
WEIGHT:
We
certify
this
document
is
true
and
correct.
Authorized
Signature:
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit E Sample Copy Only
BENEFICIARY:
DEMO
BENEFICIARYCO.
DEMO
STREET
DEMO
CITY
HONG
KONG,
HONG
KONG
PACKING
LIST
Date:
10
Jan
2007
B/LNo:
Vessel:
Shipped
From:
JAKARTA,
INDONESIA
Shipped
To:
SAN
DIEGO,
USA
Invoice
No:
SOLD
TO:
BUYERS
INTERNATIONAL
315
PTATANGO
MANGO
BULILIMAH
KTABOROON,
CA11203
Letter
of
Credit
No:
M1241204NS00178
Issued
By:
IMPORTER’S
ISSUING
BANK
NAME
MERCHANDISE
DESCRIPTION:
LADIES BLOUSES AS PER PO. NO. 12345 LADIES
BLOUSESAS
PER
P.O.
NO.
12345
ITEMS:
PACKAGES:
QUANTITY:
NETWEIGHT:
GROSS
WEIGHT:
COMMENTS:
PACKING LIST COMMENTS HERE
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit F Sample Copy Only
SHIPPERCONSIGNEENOTIFYPARTYINTERMEDIATECONSIGNEEINITIALCARRIAGEPLACEOFRECEIPTEXPORTCARRIERPORTOFEXCHANGEB/LTOBERELEASEDATSERVICECENTERMPREPAIDU.S.$
Vessel:VoyagerTOTALCOLLECTTOTALPREPAIDAuthorizedSignatureCOLLECTU.S.$LocalCurrencyBLnumber:APLU 098033266
ConditionsonReverseSideOCEANFREIGHTPAYABLEATPLACEOFDELIVERYPARTICULARSFURNISHEDBYSHIPPERExportValuationMARKS&NO.s/CONTAINERNO.SNO.OFPKGSH.M.STNEMERUSAEMTHGIEWSSORGSDOOGDNASEGAKCAPFONOITPIRCSEDPORTOFLOADINGPAGEEXPORTREFERENCESFORWARDEDAGENT(ReferencesF.M.C.No)
POINTANDCOUNTRYOFORIGINOFGOODSALSONOTIFYB/LNUMBERCNTRY: US
1 OF 1
J.E. LOWDEN & CO FMC87NF CHB5118
275 BATTERY STREET SUITE 400
SAN FRANCISCO CA 94111
TEL:415-781-7040
FAX:415-392-3970
NO SED REQUIRED, AES 942267037-SF010
5028
CTR NBR SEAL NBR T/S MODE QUANT/TYPE
CRLU910345-9 4492 R40 CY/CY 1440 CTNS
SHIPPER’S WEIGHT LOAD AND COUNT
THESE COMMODITIES, TECHNOLOGY OR SOFTWARE WERE EXPORTED FROM
THE U.S. IN ACCORDANCE WITH THE EXPORT ADMIN. REGULATIONS.
DIVERSION CONTRARY TO U.S. LAW IS PROHIBITED.
ON BOARD APL BELGIUM 107 ON AUG.28, 2007 AT OAKLAND
APLU 098033266
NON-NEGOTIABLESEAWAYBILLAPL BELGIUM 107
KAOHSIUNG KEELUNG
1440
NO M/N
43200#
19595K 1-40 FT CY/CY CONTAINER/S SL&C
CARTONS
FRESH NECTARINES
UNDER REFRIGERATION
MAINTAIN TEMPERATURE 34 DEGREES F
VENT SETTING: 0015 CFM
FREIGHT PREPAID
NLR
OAKLAND
PaymentbyChequetobemadetotheorderofAPL-Co.ED.Ltd.
NON-NEGOTIABLECOPYThisBillofLadingisgovernedbyandsubjecttothetermsandconditionsofAPL’sBillofLading,whichmaybefoundonthereversesideofthisdocumentorobtainedonyourHomeportat:
www.apl.comorbyAPLuponrequest.
Date:AUG. 28, 2007 AmericanPresidentLines,Ltd.,TheCarrierPlaceIssued:SERVICE CENTER By:
APL
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Exhibit G Sample Copy Only
SHIPPER/IMPORTERCONSIGNEE(Notnegotiableunlessconsigned“toorder”)
NOTIFYPARTYPRE-CARRIAGEBYPLACEOFRECEIPTOCEANVESSEL/VOY.NO.
PORTOFDISCHARGENo.ofOriginalsByPlaceandDateofB/LIssue:TotalsPayAt:
PLACEOFDELIVERYContainerNo.;SealNo.;MarksandNo.sTypeorKindofContainersorPackages-DescriptionofGoodsPORTOFLOADINGBOOKINGNO.
EXPORTREFERENCESFORWARDINGAGENTAlsoNotify--ExportInstructionsforMerchant’sReferenceOnlyB/LNUMBER600781434-A
FMC# 0087
J.E. LOWDEN & CO
275 BATTERY ST., STE 400
SAN FRANCISCO CA 94111
TO ORDER OF SHIPPER
THESE COMMODITIES, TECHNOLOGY, OR SOFTWARE WERE
EXPORTED FROM THE UNITED STATES IN ACCORDANCE
WITH THE EXPORT ADMINISTRATION REGULATION.
DIVERSION CONTRARY TO U.S. LAW PROHIBITED.
MOLU600781434
BILLOFLADINGNON-NEGOTIABLE(COPY)
MOL DISCOVERY
NAGOYA NAGOYA -CY
MCTU0015535/0008087/C4
MOLU0023233/0008085/C4
MOGU0044804/0008175/C4
TRIU9731550/0008156/C4
CAXU9774887/0008155/C4
SED Not Required -AES 942267037-SP01051660
FREIGHT PREPAID. SHIPPER’S LOAD AND COUNT.
5 x 40’ HIGH CUBE CONTAINERS
SAID TO CONTAIN:
3F678.89101BL00.88948SGAB04033M008.882GK00.05583ETILREPLADEN ON BOARD THE VESSEL MOL DISCOVERY VOY NO 016M AT OAKLAND, CA ON 09-26-2007
OFR
BCG
DOCUMENT
JAPAN TWC
5.000 40
5.000 40
1.000 BL
5.000 40
0110081A02
OAKLAND, CA UNITED STATES
OAKLAND, CA -CY
GrossWeightMeasurementsMitsuiO.S.K.Lines,Ltd.
MitsuiO.S.K.Lines,Ltd.,asCarrierPointandCountryofOriginofGoods(forMerchant’sReferenceOnly)
LoadingPierTerminalFinalDestinationforMerchant’sReferenceNo.ofContainersorPackagesTotalnumberofContainersorotherpackagesreceivedbythecarrier(inwards):
CodeTariffItemBasisFreightedAsCurr.RatePerPrepaidCollectParticularsfurnishedbyShipperCRB# 511B
OAKLAND -TRAPAC PORT
FIVE CONTAINERS
PC
PC
PB
PC
40
40
BL
40
USD
USD
USD
USD
600.00000
140.00000
25.00000
240.00000
3000.00
700.00
25.00
1200.00
LADEN ON BOARD THE
VESSEL 09-26-2007 THREE SAN FRANCISCO 09-26-2007
USD 4925.00
SAN FRANCISCO
ConditionsonReverseSide
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Frequently Asked Questions
What documents should I require?
You may request the issuing bank to stipulate any of the above or additional documents that you may need or want.
In addition, you should have your customs broker verify that all documents that are required in order to clear the
goods through customs have been stipulated. While letters of credit are very flexible, one common-sense rule is to
exclude excess detail in the letter of credit, as well as requirements for documents that the seller cannot provide.
If you attempt to include documents or conditions in the letter of credit that the seller finds objectionable, they will
most likely contact you with a request for an amendment before shipment is made. This invariably will cause delay
and additional cost.
What happens when the seller does not submit all of the required documentation?
It is your bank’s obligation to examine the documents received from the seller’s bank with the utmost care, and
make payment only when all documents conform to the letter of credit that was issued on your instructions. If
the issuing bank discovers discrepancies in the documents, they will contact you, list the discrepancies found for
your consideration, and inquire as to whether you wish to authorize payment. You must make a decision within a
reasonable time period to avoid the possibility of the seller arranging for the return of the merchandise or the sale
of the merchandise to a third party.
What internal controls does the bank employ to ensure accurate documentary review?
How does the bank measure quality of service?
Bank of America exercises due diligence and care when examining documents presented under letters of credit
in accordance with the guidelines of Uniform Customs and Practice for Documentary Credits (UCP). We have
established several levels of checking to ensure our documentary review meets your requirements. Your letters of
credit and documents will be checked by our experienced trade specialists who are familiar with your processing
and document requirements. Each trade specialist has a specific delegated authority regarding negotiation.
For any transaction over that specific dollar amount, an additional review is required. A trade specialist will
review all the transactions again to ensure they are in compliance with both your requirements as well as the
International Standard Banking Practice (ISBP). Our trade operations managers also perform periodic reviews of
the transactions in order to maintain consistent service quality and accuracy.
We measure quality using the following five key elements:
• Timeliness
• Responsiveness
• Accuracy
• Courtesy
• Knowledge
With our strong commitment to service quality, we have set up a system of measurements. All transaction
processing times and customer inquiries are recorded by our system automatically. Our trade operations managers
review these service levels on a regular basis to ensure that our service standards are met. Historically, the review
process mentioned above has resulted in an adherence rate that consistently exceeds 95%.
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
A Discussion of the International Standard Banking Practice for the
Examination of Documents under Documentary Credits (ISBP)
In November of 2002, the National Committees of the International Chamber of Commerce (ICC) Banking
Commission voted overwhelmingly to adopt the International Standard Banking Practice for the Examination of
Documents under Documentary Credits, also known as the ISBP. It is believed that the adoption of the ISBP will
reduce the number of rejections by banks of documents under documentary credits. The ISBP was updated in July
2007 to bring it in line with UCP 600.
The ISBP was written to help businesses that follow the International Chamber of Commerce’s internationally
accepted rules for letters of credit, the Uniform Customs and Practice for Documentary Credits (UCP). Currently,
it is reported that discrepancies in letter of credit documents found by banks in the interpretation and application
of the UCP have led to 60-70% of documents being rejected on first presentation. As letters of credit are one of the
chosen methods of payment for financing world trade, these rejections have been slowing trade and at times have
led to costly disputes and court cases.
The ISBP has been written as a supplement to the UCP, and explains how theUCP applies to day-to-day practice. It
does not amend the UCP, but explains how the practices articulated in the UCP are to be construed by businesses
worldwide.
The ISBP deals with some of the following most-questioned practices:
• Alterations: What constitutes an “alteration” or “addition” to a document and when and how should these be
authenticated?
• Drafts: What constitutes a proper endorsement? When does “sight” really occur when documents are
discrepant? How should alterations on drafts be treated?
• Signing of documents: How should documents be signed if not expressly stated in the letter of credit?
• Applicant and beneficiary addresses: How should obvious typing errors in the name and address on documents
be handled? What about different addresses of the same company?
• Trade terms: Must trade terms, such as Incoterms, appear on the commercial invoice and other documents?
• Mathematical calculations: How to deal with mathematical calculations appearing on invoices and other
documents.
• Combined documents: Should a beneficiary’s certificate, when required under a letter of credit, appear on the
invoice or be included as a separate document?
• Transport documents: What constitutes the “face” of a document?
• Insurance documents: What constitutes a full set? What constitutes a proper endorsement? How does one
determine the effective date?
Bank of america merrill lynch SolutionS for importerS
Chapter 05
A Closer Look at Letter of Credit Documents
Potential benefits of the ISBP to trade business are significant:
• As an importer or applicant of a letter of credit, you can look forward to faster receipt of import documents,
avoiding demurrage charges and delays in the receipt of goods and ultimately reducing the cost of goods.
• Banks are anticipating that this new consistency will enhance straight-through processing and significantly
reduce the amount of time spent on dealing with discrepancies in their back offices.
• Your supplier, the beneficiary of your letter of credit, should realize improved cash flow and efficiency as a
result of their improved knowledge of document preparation and presentation requirements.
• The complex nature of the letter of credit will no longer be an obstacle, but an asset to the participants and to
the future growth of world trade.
The full text of the International Standard Banking Practice for the Examination of Documents under Documentary
Credits can be ordered from the ICC Bookstore at www.iccbooksusa.com.
Bank of america merrill lynch SolutionS for importerS
084Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
084Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
Chapter 06
Documentary Collection for Importers
Documentary collections were introduced in the first chapter of this guide, which explored the inherent collection
risk factors of buyers and sellers in addition to basic background information. This section expands upon that
information with definitions, a flowchart and significant additional information.
What are bank collections?
Bank collections are the delivery through banking channels of various commercial and shipping documents for
release to a buyer against either payment or acceptance of financial instruments.
What are documents?
Documents are financial and/or commercial instruments.
a.
Financial documents include bills of exchange (drafts), payment receipts, checks, promissory or demand
notes, or other similar instruments.
b.
Commercial/shipping documents include invoices, bills of lading, shipping receipts, title documents,
commercial certificates (weight, origin, packing, etc.) or any other documents not interpreted as financial
documents.
What are clean versus documentary collections?
Clean collections are collections of financial documents without attached commercial documents. Documentary
collections are collections of commercial documents and may or may not have financial documents attached.
Who are the parties to a collection?
The involved collection parties consist of the “drawer,” or the party that requests the collection process through
his/her bank called the “remitting bank.” A “collecting bank” is the bank that makes the ultimate proposal for
acceptance or payment of documents to the final party under the collection order, known as the “drawee”.
What are foreign collections?
Foreign collections through banks are a time-proven, low-cost method of collecting money. Collections abroad can
involve a variety of items in the form of documents that companies or individuals are trading for a payment or
a promise of payment of money. Banks are entrusted with these items for their proper release when acceptance
or money is obtained as instructed. The charge for this service is usually a nominal flat fee, plus out-of-pocket
expenses.
What are the benefits of collections for importers?
When you are dealing with a familiar trading partner, you should consider using documentary collections. A
documentary collection is a secure alternative to the risk of paying cash in advance, and it does not tie up your
credit facility.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
Why use Bank of America for documentary collections?
Savvy importers know when and how to protect themselves from unfamiliar trading partners and risky
marketplaces. You rely on, and know how to leverage, established trade partnerships to ensure prompt delivery
of the goods you need. Maintaining sound relationships with your suppliers while safely managing the process of
receiving title to the goods you ordered are two ingredients of a successful trade partnership.
Documentary collections can work to your advantage because payment is contingent on your bank receiving and
holding the documents that you will rely on to obtain your goods. These shipping documents—which you and your
seller agree to in advance—could include bills of lading or other title documents, commercial invoices, packing lists,
certificates of origin or inspection certificates.
When Bank of America receives documents from your supplier or your supplier’s bank, our collection staff records
the collection and notifies you that your supplier has delivered proof of shipment. You then either pay for the goods
or accept a time draft, depending on the terms you’ve agreed to with your supplier. In either case, title documents
will be released so that you can obtain your goods. When you pay or the shipment, we remit payment to your
supplier through the collecting bank.
Here again, Bank of America’s Web-based product, Bank of America Direct® Trade Services, can be utilized to
process these transactions and provide the comprehensive reporting so critical to your business.
The two types of documentary collections are distinguished by the timing of the payment:
• Documents against payment (also known as sight draft or cash against documents)—you pay Bank of America;
we release the documents giving you title and forward your payment to your supplier’s bank.
• Documents against acceptance (financing agreed to in advance with your supplier)—you sign a time draft
promising to pay for the goods at a future date. Once you accept the draft you receive title documents.
Bank of America can receive documents from your supplier’s bank, or directly from your supplier. Either way, you
can be sure that you will be notified promptly and that you will receive the documents upon acceptance or when
payment has been made. That means no matter what the distance is between you and your supplier, you will receive
documentation promptly.
Bank of America makes it easy to establish an incoming documentary collection relationship in three simple steps:
01. Complete our easy-to-use Incoming Documentary Collection Agreement.
02. Submit the completed application to your local Bank of America banking center or Trade Services office.
03. Instruct your supplier to send collection documents to a Bank of America Trade Operations Center as the
presenting bank. Naming Bank of America as your presenting bank for import documentary collections
means that you will be working with a bank you know and trust.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
How are collections sent?
Collections may be sent to collecting banks by courier service (e.g., Airborne, FedEx, DHL), express airmail or
regular airmail. In the past it has been customary for sellers to deliver documents to their bank for transmittal as
mentioned. The documents would be accompanied by a precise letter of instruction, which the seller’s (remitting)
bank could transcribe on its own collection letter form. Today, however, many banks provide a service called direct
documentary collections. This is an arrangement that enables the exporter to send documents, drafts and collection
letters to the buyer’s bank. The purpose is to save time that would otherwise be required to pass the collection
through the exporter’s bank first. The seller sends a copy of the collection letter to his/her bank, which follows up on
the collection.
Commercial documents
As with letters of credit, the basic instrument through which payment is obtained is a draft. This is an order for
the payment of money drawn by one party, the drawer, on another, the drawee. Drafts may be payable at sight upon
presentation or at a fixed future date, e.g., 60 days from presentation. A properly executed draft is a negotiable
instrument. Drafts are generally referred to as bills of exchange outside the United States. A time draft that has
been accepted by the drawee is called a trade acceptance.
The documents accompanying the draft are those required by customs authorities in both countries and those
stipulated by the importer. Failure to provide proper documentation could place the shipment in serious jeopardy.
A bill of lading is the title document for the goods shipped. In most cases, a negotiable bill of lading is used and
title is transferred by a simple endorsement. In the case of air shipments, the bills of lading are non-negotiable. To
prevent the importer from obtaining possession of the merchandise without paying or accepting a time draft, the
exporter may consign the shipment to the collecting bank, provided that the bank gives advance approval. Another
alternative may be to consign the goods to an impartial agent. If either option is not possible, the documentary
collection device may not be advisable when a straight or non-negotiable bill of lading or air waybill is used.
While the seller or its bank may select the collecting bank, the transaction may be expedited by using the buyer’s
bank in that role. Typically, the seller’s instructions list the documents transmitted and state the conditions under
which they are to be given to the buyer; they set forth the channel through which proceeds are to be remitted and
establish responsibility for paying bank charges. If the seller has an office or local representative in the buyer’s
country, this should be indicated in addition to listing a contact to be made there in the event of any problems.
Collection fees
In addition to the protection provided by the retention of title by the exporter, documentary collections have other
advantages. The fees are usually lower than those charged for letters of credit, and the collecting bank’s assistance
expedites payment over that which would be obtained by open account. It should also be noted that foreign
collecting banks deduct their fees from the funds received before sending them back to the seller. Those charges in
some countries are surprisingly high. Sellers can learn what fees are involved by asking their banks. If the costs
cannot be absorbed, arrangements should be made during the sale to have the buyer pay all or part of the fees. If
the collection letter does not specify which party is to pay, the fees will be deducted from the collected amount.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
Collection Advantages/Disadvantages
Documentary collections are widely used to settle trade transactions. They are the primary terms of sale when a
long standing relationship exists between the buyer and seller and particularly when the buyer is an authorized
dealer or distributor for the seller. In practice, the most common disadvantage is the delay when local funds are
exchanged into dollars or other hard currencies desired by the sellers for sales to developing countries. Those
delays are most often the fault of the exchange control authorities, not the buyers.
Please note that when the goods being shipped are perishable or manufactured to a buyer’s unique specifications,
this settlement method may not be advisable.
I.C.C. rules
The International Chamber of Commerce Uniform Rules for Collections (URC 522) govern the rights and
responsibilities of the parties inmost countries. Courts in those countries that accept these rules will, for the most
part, apply them unless contradictory laws or a unique set of facts require otherwise. In a collection transaction, a
bank acts as an agent for the seller. It is bound by the seller’s instructions and acts at its own risk if it takes actions
not covered by the instructions.
The full text version of the URC 522 can be ordered at www.iccbooksusa.com.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
Cash Flow
Incoming Documentary Collections
exporter importer
exporter’s Bank
exporter Documents
(remitting Bank)
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Chapter 06
Documentary Collection for Importers
exporter importer
exporter’s Bank importer’s Bank
exporter Documents Documents
(remitting Bank) (collecting Bank)
Bank of america merrill lynch SolutionS for importerS
Cash Flow
Incoming Documentary Collections (Continued)
Chapter 06
Documentary Collection for Importers
Cash Flow
Incoming Documentary Collections (Continued)
importer’s Bank
exporter importer
(collecting Bank)
importer’s Bank exporter’s Bank
exporter
(collecting Bank) (remitting Bank)
Documents
exporter’s Bank importer’s Bank
exporter Documents
(remitting Bank) (collecting Bank)
importer’s Bank
Documents importer
(collecting Bank)
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092Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 07
Bankers’ Acceptances Under
Import Letters of Credit
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Bank of america merrill lynch SolutionS for importerS
Chapter 07
Bankers’ Acceptances Under
Import Letters of Credit
Chapter 07
Bankers’ Acceptances Under Import Letters of Credit
A bankers’ acceptance is a draft (an order for payment) or bill of exchange, payable at a fixed or determinable future
date, which is drawn on and accepted by a banking institution in the course of financing domestic or international
trade. By accepting the draft, the bank assumes an unconditional promise to pay the amount of the draft to any
proper holder who presents the draft for payment at maturity. A customer on whose behalf a draft is accepted
is obligated to make payment to the bank on or before the maturity date of the draft. A banker’s acceptance is a
negotiable instrument that normally does not state an interest rate. Banker’s acceptances are bought and sold on
a discount basis (that is, for less than face value) by subtracting an interest charge from the face amount of the
acceptance. When a bank buys (discounts) a banker’s acceptance, it earns the difference between the purchase
price and the face amount that will be reimbursed at maturity by the client. After a bank has initially discounted
its acceptance, it may either hold the bill until maturity in its own portfolio as an investment, or rediscount with
another investor.
Appropriate types of business for bankers’ acceptance financing
Because of restrictions imposed by the Federal Reserve Act and related regulations, the majority of users of this
type of financing tend to be engaged in some aspect of domestic or international commerce. Nonetheless, there
remains a very broad segment of business types that can effectively use this vehicle when the financing relates to
the movement of goods or their storage under contract of sale. Acceptance financing may also be employed for other
purposes as well, but there are some additional limitations to its use. Financial institutions, including banks and
other types of lending institutions, that do not have the ability to create or market banker’s acceptances because of
laws, regulations, lack of expertise, size, location or lack of market recognition may also find this type of financing
to be useful by employing banks such as Bank of America that do have this capacity. The advantage of acceptance
financing is its fixed, predetermined cost.
Financing characteristics
Unlike conventional bank lending, which normally requires funding for the life of the loan, there is an active
secondary market for banker’s acceptances. This secondary market gives these negotiable instruments a high
degree of liquidity that permits a bank to sell or rediscount them rather than hold them in portfolio. The secondary
market consists principally of a number of dealers (most of whom are nationally known brokers or securities
dealers) who stand ready to buy acceptances from banks at a discounted rate primarily for resale to their
customers. Banks may also market acceptances directly to customers or others who seek high-quality, short-term,
liquid investments. Because of the marketability feature, it has been said that when a bank finances a customer
on an acceptance basis, it lends its name rather than its money. The holder or investor in acceptances has the
assurance of payment by both the accepting bank and other endorsers. For this reason banker’s acceptances are
marketed at very competitive rates.
Bank of america merrill lynch SolutionS for importerS
Chapter 07
Bankers’ Acceptances Under Import Letters of Credit
Structure and mechanics of transactions
Of interest to importers, banker’s acceptances are created through commercial letters of credit by requiring that
drafts be drawn to mature at a specific future date rather than at sight. If the documents accompanying the
time draft are found to be in order, the time draft is accepted by the drawee bank, thereby creating a banker’s
acceptance. If the beneficiary desires payment before maturity of the draft, the bank may discount the draft and pay
the beneficiary. Banker’s acceptances are also generated independent of commercial letters of credit. A banker’s
acceptance is actually created when a bank formally acknowledges its obligation to honor a time draft drawn on
itself by stamping word “Accepted” across the draft, dating and officially signing the notation.
Parties to the draft
There are three main parties involved in the execution of a draft:
01. The Drawer: The seller or exporter who draws the draft.
02. The Drawee: The person or entity to whom the draft is addressed. This will be a bank under a letter of credit
transaction.
03. The Payee: The specific person/company to whom payment is directed.
Tenor
Time (usance) drafts for acceptance must indicate payment at a fixed or a determinable future period in time.
This is called the tenor of a draft. An example of a fixed future time is a draft drawn on October 1, 2007, specifying
payment on November 1, 2007.Most time drafts, however, specify payment on a determinable future time. Various
determination type tenors are:
• Thirty days sight (30 d/s)—this means the determined payment date would be 30 days after the inscribed date
of acceptance on the draft.
• Thirty days date (30 d/d)—the determined payment date under this method would be 30 days after the date of
the draft.
• Thirty days after bill of lading date—this denotes that the draft is payable 30 days after the “on board” date
if a marine bill of lading, or 30 days after the reception date by the carrier in the case of truck, railroad or air
shipments. (See UCP 600, Articles 19 through 27).However, this type of tenor is not determinable unless the
draft also shows on its face the bill of lading date or date of receipt by the carrier. If the draft were being drawn
under a letter of credit, the preferred method would be to have the creation date of the draft the same as the
“on board” bill of lading date or receipt date.
Note: the above examples show 30 as the number of days for projection. This number can vary as necessary,
such as 45, 60, 90, 120, 150 or 180. Acceptance financing is usually short term, up to six months or 180 days.
Draft tenors must always be fixed maturities or capable of being projected to a definite maturity. A draft tenor can
never be ambiguous or based on a contingency. Examples of inappropriate tenors are: thirty days after ship arrives,
sixty days after merchandise is accepted, or forty-five days from delivery.
Bank of america merrill lynch SolutionS for importerS
Chapter 07
Bankers’ Acceptances Under Import Letters of Credit
Advances
The creation of a banker’s acceptance does not itself generate a flow of cash since it is simply a promise to pay
the acceptance at maturity. To initiate the flow of funds, the bill must be discounted. Customarily, such discount
is made by the bank by deducting a fee (interest) from its face value for the period from the date of discount until
maturity. Inmost instances, the initial discount is performed by the accepting bank, usually at a rate related to
going market rates.
The total cost to the beneficiary consists of the fee assessed by the bank for accepting the draft and the discount.
Often, both elements are combined in an “all-in” or all-inclusive quotation to the customer. Under a letter of credit,
acceptance fees and discount costs may be either for the account of the beneficiary (normal) or the applicant.
If discount charges are payable by the applicant, discount of the acceptance is virtually automatic since the
beneficiary will receive the face amount of the acceptance as proceeds.
Repayment
The accepting bank is obliged to honor at maturity the acceptance it created, so it looks to its customer for
reimbursement. By paying the holder (purchaser) of the draft upon presentation at maturity, the bank extinguishes
its obligation.
Bank of america merrill lynch SolutionS for importerS
Chapter 07
Bankers’ Acceptances Under Import Letters of Credit
Bankers’ Acceptance Cash Flow
Flow of funds at time BA created
01
assumption: acceptance commission
Exporter draws $500,000 draft on Bank of America
at 1.5% per annum, 90 days to maturity.
02
Bank of America accepts the draft
03
assumption: discount at
Bank of America deducts acceptance commissions of $1,875 and $7500 for discount charges
illustration rate of 6%
04
05
Bank of America advances $490,625
At maturity, borrower repays Bank of America $500,000
Bank of america merrill lynch SolutionS for importerS
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Bank of america merrill lynch SolutionS for importerS
Chapter 08
Obtaining Your Merchandise
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Chapter 08
Obtaining Your Merchandise
Chapter 08
Obtaining Your Merchandise
The issuing bank will send the documents presented under your letter of credit either directly to you, or to your
customs broker, after proper examination has been completed. Your customs broker will then use the documents to
clear the goods through customs.
The customs broker will advise you of charges for duty, ocean freight, insurance or entry fees. These charges
must be paid to the customs broker immediately as failure to do so may result in penalties from U.S. Customs. In
addition, you should keep the following in mind:
• No pier pickup can be made until all duty and ocean freight have been paid
• All figures should be verified against those given by the seller
• If any of the charges appear to be out of line, advise the seller immediately
• Duty should not be paid on items that are not dutiable
• Wharfage charges must be paid at the pier
• If goods travel as loose cargo, a loading charge must be paid
• Wharfage charges and loading charges are nominal and vary from port to port.
Full container loads are normally available for pickup within two days after arrival, and loose cargo is typically
ready for pickup three or four days after docking. Either you or your customs broker can check on cargo availability
after arrival. Some steamship companies require an appointment to pick up merchandise. If your goods require
further transportation, you must provide your trucker with a delivery order on your company’s letterhead for him to
take possession of your merchandise. All the information needed for this delivery order will be contained in your bill
of lading.
What happens if the goods arrive before the documents? Much depends on the type of transport document used.
Shipments made under an “order” bill of lading will normally not be released by the carrier without a properly
endorsed original bill of lading. However, Bank of America may be able to help you avoid costly delays and
demurrage charges by issuing a Steamship Guarantee or Air Release to the carrier.
A good customs broker is frequently the key to successful importing and should be contacted before finalizing any
contracts. Customs brokers can provide you with current information on:
• All documents needed from the seller—both regular and special—in order to have your goods clear customs.
• Import duties that may be assessed on your goods.
• Any quota that limits the quantity of a specific item for import.
Some of the other ways in which your customs broker can assist you include:
• Most shipments require formal customs entry and the posting of a bond. A customs broker can assist you in
both areas.
• Goods in transit should be insured by either the buyer or seller. If you do not have a policy, and insurance is not
provided by the seller, your customs agent can obtain the necessary coverage.
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099Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 09
Incoterms—International
Shipping /Trade Terms
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Bank of america merrill lynch SolutionS for importerS
Chapter 09
Incoterms—International
Shipping /Trade Terms
Chapter 09
Incoterms—International Shipping/Trade Terms
What are Incoterms?
When buying or selling in international markets, it is critical that all parties to the transaction know and
understand the terms of sale. For example, a seller may think that he has quoted a price to a buyer exclusive of the
freight costs.
If the buyer thought that the price included the freight charges then a costly misunderstanding has occurred. For
this reason the International Chamber of Commerce has developed a set of trade terms that are used worldwide.
They come under the general heading of Incoterms. Some of the more frequently used terms are outlined below.
Incoterms were revised in January 2000.
The following is a summary of the highlights of the Incoterms, which is not intended to furnish Incoterms in
their entirety. For a more complete understanding please refer to the Guide to Incoterms 2000 published by ICC
Publishing Co. in New York, which can be ordered through ICC’sWeb site at www.iccbooksusa.com.
EXW (ExWorks . . . named place)
Ex Works means that the seller fulfills his obligation to deliver when he has made the goods available at his
premises (i.e., works, factory, warehouse, etc.) to the buyer. In particular, he is not responsible for loading the goods
on the vehicle provided by the buyer or for clearing the goods for export, unless otherwise agreed. This term thus
represents the minimum obligation for the seller, and the buyer has to bear all costs and risks involved in taking
the goods from the seller’s premises. If the parties wish the seller to be responsible for the loading of the goods on
departure and its risks and costs, this should be made clear by adding explicit wording to this effect to the contract
of sale. This term should not be used when the buyer cannot carry out the export formalities directly or indirectly. In
such circumstances, the FCA term should be used, provided the seller agrees that he will load at his cost and risk.
FCA (Free Carrier . . . at the Named Point)
This term has been designed to meet the requirements of modern transport, particularly such multimodal transport
as container or roll on-roll off traffic trailers and ferries. It is based on the same main principle as FOB except that
sellers fulfill their obligations when they deliver the goods into the custody of the carrier at the named point. If no
precise point can be mentioned at the time of the contract of sale, the parties should refer to the place or range
where the carriers should take the goods into their charge. The risk of loss or damage to the goods is transferred
from seller to buyer at that time and not at the ship’s rail. A “Received for Shipment” bill of lading is acceptable in
lieu of an “On Board” bill of lading. This allows exporters to receive shipping documents more quickly and to get
paid in a more timely manner. “Carrier” means any person by whom or in whose name a contract of carriage by
road, rail, air, sea or a combination of modes has been made. When the seller has to furnish a bill of lading, waybill
or carrier’s receipt, he/she duly fulfills this obligation by presenting such a document issued by a person so defined.
Bank of america merrill lynch SolutionS for importerS
Chapter 09
Incoterms—International Shipping/Trade Terms
FAS (Free Along Side . . . named port of shipment)
This means that the sellers fulfill their obligation to deliver when the goods have been placed alongside the vessel
on the dock or quay at the named port of shipment. The buyer has to bear all costs and risks of loss or damage to
the goods from that moment. The FAS term requires the seller to clear the goods for export.
FOB (Free on Board . . . named port of shipment)
FOB means “Free on Board.” The goods are placed on board a ship by the seller at a port of shipment named in the
sales contract. The risk of loss of or damage to the goods is transferred from the seller to the buyer when the goods
pass the ship’s rail. All costs from that point forward, including freight and insurance, are for the buyer’s account.
This term can be used only for sea or inland waterway transport. If the parties do not intend to deliver the goods
across the ship’s rail, the FCA term should be used.
CFR (Cost and Freight . . . named point of destination)
CFR means “Cost and Freight.” The seller must pay the costs and freight necessary to bring the goods to the named
destination, but the risk of loss or damage to the goods, as well as any cost increases, is transferred from the seller
to the buyer when the goods pass the ship’s rail in the port of shipment. The CFR term requires the seller to clear
the goods for export. This term should only be used for sea and inland waterway transportation. If the parties do
not intend to deliver the goods across the ship’s rail, the CPT term should be used.
CIF (Cost, Insurance and Freight . . . named port of destination)
CIF means “Cost, Insurance and Freight.” This means that the seller delivers when the goods pass the ship’s rail
in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port
of destination, but the risk of loss or damage, as well as additional costs due to events occurring after the time of
delivery, are transferred from the seller to the buyer. In CIF the seller also has to procure marine insurance against
the buyer’s risk of loss or damage to the goods during the carriage. Consequently, the seller contracts for insurance
and pays the premium. The buyer should note that under the CIF term the seller is required to obtain insurance
only on minimum cover. The CIF term requires the seller to clear the goods for export. This term should be used
only for sea and inland waterway transport. If the parties do not intend to deliver the merchandise across the ship’s
rail, the CIP term should be used.
CPT (Carriage Paid To . . . named place of destination)
This term means that the seller delivers the goods to the carrier nominated by him, but the seller must also pay the
cost of carriage to bring the goods to the named destination. Like CFR, “Freight or Carriage Paid To,” the buyer
bears all risks and any other costs occurring after the goods have been so delivered. “Carrier” is defined as any
person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail,
road, air, sea, inland waterway or by a combination of methods. If subsequent carriers are used for the carriage
to the agreed destination, the risk passes when the goods have been delivered to the first carrier. This CPT term
requires the seller to clear the goods for export.
Bank of america merrill lynch SolutionS for importerS
Chapter 09
Incoterms—International Shipping/Trade Terms
CIP (Carriage and Insurance Paid To . . . named place of destination)
This term is the same as “Freight or Carriage Paid To . . .” but with the addition that the seller has to procure
transport insurance against the risk of loss or damage to the goods during the carriage. The seller contracts with
the insurer and pays the insurance premium. CIF is used for goods carried by sea, while CIP is used irrespective of
the mode of transport. This term allows the exporter the greatest control over all aspects of shipment.
DAF (Delivered at Frontier . . . named place)
This term is used typically when goods are being moved overland, and delivery of the goods will take place at the
frontier of an adjoining country. It means that the seller delivers when the goods are placed at the disposal of the
buyer on the arriving means of transport (not unloaded), cleared for export, but not cleared for import at the named
point and place at the frontier (before the customs border of the adjoining country). The frontier must be clearly
named. For example, goods being shipped from the U.S. to Mexico might have Laredo, Texas, named as the frontier.
The shipper has the responsibility of delivering the goods to Laredo, while the buyer has the responsibility to bring
the goods across the border into Mexico and clear Mexican customs. This term may be used irrespective of the
mode of transport when goods are to be delivered at a land frontier. When delivery is to take place in the port of
destination, on board a vessel or on the wharf, the DES or DEQ terms should be used.
DES (Delivered Ex-Ship . . . named port of destination)
This term means that the seller delivers when the goods are placed at the disposal of the buyer on board the ship
but not cleared for import at the named port of destination. The seller must bear all the costs and risks involved in
bringing the goods to the named port of destination before discharging. This term can be used only when the goods
are to be delivered by sea or inland waterway or multimodal transport on a vessel in the port of destination. If the
parties wish the seller to bear the costs and risks of discharging the goods, then the DEQ terms should be used.
DEQ (Delivered Ex Quay . . . named port of destination)
This term means that the seller delivers when the goods are placed at the disposal of the buyer but not cleared for
import on the quay at the named port of destination. The seller bears costs and risks involved in bringing the goods
to the named port of destination and discharging the goods on the quay. The DEQ term requires the buyer to clear
the goods for import and to pay for all formalities, duties, taxes and other charges upon import. This term can be
used only when the goods are to be delivered by sea or inland waterway or multimodal transport on discharging
from a vessel onto the quay at the port of destination. If the parties wish to include in the seller’s obligations the
risks and costs of the handling of the goods from the quay to another place (warehouse, terminal, transport station)
in or outside the port, the DDU or DDP terms should be used.
Bank of america merrill lynch SolutionS for importerS
Chapter 09
Incoterms—International Shipping/Trade Terms
DDU (Delivered Duty Unpaid. . . named place of destination)
This term means that the seller delivers the goods to the buyer (not cleared for import) but not unloaded from any
arriving means of transport at the named place of destination. The seller has to bear the full cost and risk involved
in bringing the goods thereto other than, where applicable, any “duty” (which includes the responsibility for and
the risks of the carrying out of customs formalities and payment of formalities, customs duties, taxes and other
charges) for import in the country of destination. Such “duty” has to be borne by the buyers as well as any costs and
risks caused by their failure to clear the goods for import in time. This term may be used irrespective of the mode
of transportation, but when delivery is to take place in the port of destination on board the vessel or on the quay, the
DES or DEQ terms should be used.
DDP (Delivered Duty Paid. . . named place of destination).
This term means that the seller delivers the goods to the buyer (cleared for import) but not unloaded from any
arriving means of transport at the named place of destination. The seller must bear all costs and risks involved in
bringing the goods thereto including, where applicable, any “duty” (which includes the responsibility for and the
risk of carrying out of customs formalities, customs duties, taxes and other charges) for import in the country of
destination. While the EXW term signifies the seller’s minimum obligation, the DDP term represents the maximum
obligation. If the parties wish the buyer to bear all risks and costs of the import, the DDU term must be used. The
DDP term may be used irrespective of the mode of transport; when delivery is to take place in the port of destination
on board the vessel or on the quay, the DES or DEQ terms should be used.
Bank of america merrill lynch SolutionS for importerS
Chapter 09
Incoterms—International Shipping/Trade Terms
Incoterms Summary of Sellers/Buyer’s Responsibilities
Terms
Seller
Obligated to
Deliver Terms
Goods At…
Pre-shipment
Costs Paid
By…
Freight
Costs
Arranged
By…
Insurance
Document
arranged
By…
Delivery
Receipt for
Goods (if
required)
Obtain
Transport
Document
Unload
Costs
EXW—Ex works
(...named place)
seller’s
premises
seller buyer buyer buyer buyer buyer
FCA—Free carrier
(...named place)
location
designated by
buyer
seller up
until goods
delivered to
carrier/agent
buyer buyer seller seller buyer
FAS—free
alongside ship
(...named port of
shipment)
alongside the
vessel
seller up
until goods
delivered to
carrier/agent
buyer buyer seller buyer buyer
FOS—free on
board (...named
port of shipment)
on board the
vessel
seller buyer buyer seller seller buyer
CFR—coast
and freight
(...named port
of destination)
on board the
vessel
seller seller buyer seller seller seller
CIF—cost,
insurance
and freight
(...named port
of destination)
on board the
vessel
seller seller seller seller seller seller
CPT—carriage paid
to (...named place
of destination)
to the carrier seller seller buyer seller seller seller
CIP—carriage &
insurance paid to
(...named place of
destination)
to the carrier seller seller seller seller seller seller
DAF—delivered at
frontier (...named
place)
seller’s
frontier
seller seller up
to the
frontier
buyer seller buyer (at
frontier)
buyer
DES—delivered ex
ship (...named port
of destination)
destination
port while still
on board
seller seller buyer seller seller buyer
DEQ—delivered
ex quay
(...named place of
destination)
the
destination
seller port
quay
seller seller buyer seller seller seller
(including
duty)
DDU—delivered
duty unpaid
(...named place of
destination)
disposal of
buyer, named
place
seller seller buyer seller seller seller
(excluding
duty)
DDP—delivered
duty paid
(...named place of
destination)
an inland
designation
designated by
buyer
seller seller buyer seller seller seller
(including
duty)
Bank of america merrill lynch SolutionS for importerS
0105Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 10
Standby Letters of Credit
and Special Purpose Letters of Credit
0105Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 10
Standby Letters of Credit
and Special Purpose Letters of Credit
Chapter 10
Standby Letters of Credit and Special Purpose Letters of Credit
Standby Letters of Credit
A standby letter of credit is an assurance of the performance of the client (applicant) to a beneficiary. Bank of
America issues standby letters of credit for its clients (individuals, corporations or correspondent banks).
The standby letter of credit substitutes the credit standing of Bank of America for that of our client. Generally,
standby letters of credit are payable against the presentation of a draft and a statement from the beneficiary
stating that our client, the applicant of the standby letter of credit, has defaulted under the terms of a specific
underlying agreement.
The standby letter of credit is an extremely flexible instrument and can be tailored to fit many situations.
The following are examples of typical uses for standby letters of credit:
• Bid and performance bonds or guarantees
• To ensure the repayment of principal and/or interest on loans, bonds, or commercial paper
• Assurance of timely invoice payment
• Substitute for a cash security deposit.
Applicants should be cautious when a standby letter of credit is requested. Since most of these letters of credit
require only statements or declarations prepared by the beneficiary, they can be drawn on arbitrarily. The
beneficiary should therefore be of unquestionable character and have an established relationship with the applicant.
Standby letters of credit are governed by the International Standby Practices, International Chamber of Commerce
Publication 590 (ISP98), when incorporated by reference in the standby letter of credit. The ISP98 reflects generally
accepted practice, custom, and usage of standby letters of credit.
The formulation of standby letter of credit practices in separate rules evidences the maturity and importance of this
financial product. The outstanding amounts of standby letters of credit greatly exceed the outstanding amounts
of commercial letters of credit. While the standby letter of credit is associated with the United States, where it
originated and where it is most widely used, it is truly an international product. Non-U.S. bank outstandings have
exceeded those of U.S. banks in the United States for the past several years. The full text version of the ISP98 is
available from the International Chamber of Commerce at www.iccbooksusa.com.
Bank of america merrill lynch SolutionS for importerS
Chapter 10
Standby Letters of Credit and Special Purpose Letters of Credit
Bank of America provides...
Feature Advantages Benefits
Cash Flow Financial strength of Bank of America Frees customer funds that would otherwise have been
tied up separately as deposits.
Expertise Staff of professionals have years of experience in the Assures that the standby letter of credit is issued in a
technical handling of standby letters of credit. manner that best protects client interest.
Foreign Exchange Bank of America can issue a standby letter of credit in Achieves compliance with contracts requiring foreign
currencies other than U.S. dollars. currency payments.
Credit Assurance Bank of America can issue a standby letter of credit on Provides access to foreign loans that would otherwise
behalf of a client to serve as a n assurance to a bank not be available to client.
overseas for the repayment of loans made by the bank
to our client or its subsidiary or affiliate.
A “Standby Letter of Credit Application Kit,” which includes additional information and guidance on completing a
standby letter of credit application, is available through your local Global Trade & Supply Chain Solutions Officer.
Bank of america merrill lynch SolutionS for importerS
Chapter 10
Standby Letters of Credit and Special Purpose Letters of Credit
A typical standby letter of credit, as issued, is shown here:
PLACEAND
DIATE
OF
ISSUE
IRREVOCABLE
STANDBY
LOSANGELES,
CA
JUNE
29,
2007
LETTER
OF
CREDITNO.
XXXXXXX
APPLICANT
DATEAND
PLACE
OF
EXPIRY
(APPLICANT
NAME)
DECEMBER
31,
2010
IN
SAN
FRANCISCO,
CA
35
MAIN
STREET
SAN
FRANCISCO,
CA94116
BENEFICIARY
(BENEFICIARYNAME)
ADVISING
BANK
GPO
BOX
444
BANK
OFAMERICA
HONG
KONG
HONG
KONG
AMOUNT:
U.S.$3,500,000.00
(THREE
MILLION
FIVE
HUNDREDTHOUSAND
U.S.
DOLLARS)
WE
HEREBYISSUEINYOUR
FAVORTHIS
IRREVOCABLE
STANDBYLETTER
OF
CREDITNO.
XXXXXXXWHICH
IS
AVAILABLE
BYPAYMENTWITH
OURSELVESAGAINSTPRESENTATIONOFYOUR
DRAFTATSIGHTDRAWN
ON
BANK
OFAMERICA,
LOSANGELES
CALIFORNIA,
BEARINGTHE
CLAUSE:
“DRAWN
UNDER
STANDBYLETTER
OFCREDIT
NUMBERXXXXXXXOF
BANKOFAMERICA,LOSANGELES,CA”ACCOMPANIED
BYTHEFOLLOWING
DOCUMENTS.
BENEFICIARYSIGNED
STATEMENTCERTIFYINGTHAT(APPLICANTNAME)HAS
FAILEDTO
COMPLYWITHTHE
TERMSAND
CONDITIONS
OF
CONTRACTNO.
KFX-KAF-02005.
IT
ISACONDITION
OF
THIS
LETTER
THAT
IT
WILL
BEAUTOMATICALLY
EXTENDED
WITHOUT
AMENDMENTFORADDITIONALPERIODS
OF
ONEYEARFROMTHECURRENTORANYFUTURE
EXPIRATIONDATE
HEREOFUNLESS,SIXTY(60)ORMOREDAYSPRIORTOANYSUCHEXPIRATIONDATE,BANKOFAMERICAWILLNOTIFY
BENEFICIARYBYREGISTERED
MAILOR
COURIERSERVICEATTHEABOVEADDRESS,THATTHE
BANK
ELECTED
NOT
TO
RENEWTHIS
LETTER
OFCREDITFORANYSUCHADDITIOANLPERIOD.
ITISAFURTHER
CONDITION
HEREOFTHATBENEFICIARYMAYDURINGTHE
LASTFIFTEEN
(15)
DAYS
OFTHE
THEN
CURRENTVALIDITYPERIOD
DRAWHEREUNDERBYMEANS
OFTHEIR
SIGHTDRAFTS
ON
OURSELVES
FORAN
AMOUNTUPTOTHEAVAILABLE
BALANCEACCOMPANIED
BYTHEIRSIGNED
STATEMENTSTATINGTHATTHEY
HAVE
RECEIVEDNOTICEFROM
BANK
OFAMERICA,
LOSANGELES,
CATHATBANK
ELECTED
NOTTO
CONSIDERTHE
EXPIRYDATE
OF
STANBYLETTER
OF
CREDITNUMBER
XXXXXXX
EXTENDED.
PARTIALDRAWINGS
PERMITTED.
ALLREQUIRED
DOCUMENTS
MUSTBE
PRESENTEDTO
BANK
OFAMERICA,
LOSANGELES,
CA.
WEHEREBYENGAGEWITH
YOUTHATDRAFTSDRAWNANDPRESENTEDINTHECONFORMITYWITHTHE
TERMS
OFTHIS
CREDITWILLBE
DULYHONOREDON
PRESENTATION.
“EXCEPTSO
FARASOTHERWISE
EXPRESSLYSTATED,THIS
DOCUMENTARYCREDITIS
SUBJECTTO
INTERNATIONALSTANDBYPRACTICES
(ISP98),PUBLICATIONNO.590
OFTHE
INTERNATIONALCHAMBER
OF
COMMERCE.”
Bank of america merrill lynch SolutionS for importerS
Chapter 10
Standby Letters of Credit and Special Purpose Letters of Credit
Special Purpose Letters of Credit
Revolving letters of credit
A revolving letter of credit is one which, under the terms and conditions thereof, the amount is renewed or
reinstated without specific amendment to the letter of credit.
A revolving letter of credit:
• Can be revocable or irrevocable
• Can revolve in relation to time or value
In the case of a letter of credit that revolves in relation to time, which is available for up to $15,000.00 per month
during a fixed period of time such as six months, the credit is automatically available for $15,000.00 each month
whether or not any sum was drawn during the previous month. A letter of credit of this nature can be cumulative or
non-cumulative. If the letter of credit is stated to be cumulative, any sum not utilized during the first period carries
over and may be utilized during subsequent periods. If the letter of credit is non-cumulative, any sum not utilized in
a period ceases to be available (not carried over to a subsequent period).
In the case of a letter of credit that revolves in relation to value, the amount of the letter of credit is reinstated
upon utilization, with a given overall period of validity. The letter of credit may provide for automatic reinstatement
immediately upon presentation of the specified documents only after receipt by the issuing bank of those
documents. To give a degree of control it is necessary to specify the maximum total amount that may be drawn
under the letter of credit. Such amount would have to be decided by the buyer and seller to meet their requirements
and agreed to by the issuing bank. A letter of credit for the full value of goods to be shipped by requiring specific
quantities to be shipped weekly or monthly, and allowing partial shipments, is not a revolving credit. It is a letter of
credit available by installments as defined in the UCP 600 Article 32. In this type of letter of credit it is important to
note than any missed installment makes the letter of credit unavailable for further drawings.
Transferable letters of credit
A transferable letter of credit is one that can be transferred by the original (first) beneficiary in whole or in part,
to one or more other parties (second beneficiaries) (ISP98 Rule 6 orUCP 600 Article 38,). It is normally used when
the first beneficiary does not supply the merchandise but is a broker and thus wishes to transfer part, or all, of the
rights and obligations to the actual supplier(s) as second beneficiary(ies). This type of letter of credit can only be
transferred once (any second beneficiary cannot transfer to a third beneficiary).
Bank of america merrill lynch SolutionS for importerS
Chapter 10
Standby Letters of Credit and Special Purpose Letters of Credit
The transfer must be effected in accordance with the terms of the original letter of credit, subject to the following
exceptions:
01. The name and address of the first beneficiary may be substituted for that of the applicant of the letter of
credit.
02. The amount of the letter of credit and any unit price may be reduced; this would enable the first beneficiary
to draw against the letter of credit for commission or profit.
03. The expiration date of the credit, the period of time after date of issuance of the transport document for
presentation of documents, and the shipment period may be shortened.
04. The percentage for which insurance coverage must be effected may be increased in such a way as to provide
the amount of cover stipulated in the original letter of credit.
It should be noted that a letter of credit would only be issued as “transferable” on the specific instructions of the
applicant. This would mean that both the letter of credit application form and the letter of credit itself must clearly
show that the credit is to be made transferable (only an irrevocable letter of credit would be issued in this form).
The transfer is effected by the bank authorized in the letter of credit as the transferring bank at the request of the
first beneficiary.
In practice, the first beneficiary is allowed to substitute any invoices and any drafts for those presented to the
transferring bank by the second beneficiary. The bank must correlate and check both invoices and drafts with the
other documents called for and ensure that all documents comply with the terms of the original letter of credit.
Bank of america merrill lynch SolutionS for importerS
0111Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management
and Foreign Exchange Services
0111Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management
and Foreign Exchange Services
Chapter 11
International Cash Management and Foreign Exchange Services
International Treasury Management Services
Bank of America Treasury Management Services help you manage your cash position and cash flow. We
build comprehensive, customized solutions to meet the unique needs of our clients, improve their financial
competitiveness, and make their treasury functions more efficient.
By working with you, we help you streamline the way you make payments, collect your receipts, and reconcile your
accounts worldwide. With our broad treasury management suite of services, we guide you through the steps to
make your treasury functions more efficient.
Bank of America Treasury Management services can:
• Reduce your administrative costs and help you analyze and forecast your financial needs
• Help you concentrate on managing your working capital and other strategic financial objectives, including
maximizing company investments
• Increase cash for investment, capital expenditures, and other purposes by helping you predict your day-to-day
cash needs
• Free up resources by providing you with fast and accurate information.
Payments
Bank of America offers you quick, efficient payment services that can streamline the way you remit to your vendors,
clients and employees and reconcile your accounts. We can provide a customized solution, integrating the following
components:
• Account Reconciliation—reconcile your accounts quickly, easily and accurately
• Automated ClearingHouse (ACH)—save time and money by moving funds electronically, from your own
personal computer
• Electronic Data Interchange (EDI)—increase your efficiencies through the electronic transfer of business data
with your business partners
• Information Reporting—receive timely account information at your desktop
• Wire Transfer Service—securely and efficiently send or receive same-day funds.
Receipts
We can help you quickly turn your receipts into cash while reducing information float and improving credit
management. If you are challenged to provide your clients with payment flexibility or to improve efficiencies in your
receipt processing, we can help you manage your receivables by developing customized solutions from the following
range of services:
• Account Reconciliation—fast and economical method to help you manage your deposit activity by outsourcing
all or part of your monthly checking account reconciliation functions
• Automated ClearingHouse (ACH)—save time and money by moving funds electronically
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management and Foreign Exchange Services
• Electronic Data Interchange (EDI)—increase your efficiencies through the electronic transfer of business data
with your business partners
• Information Reporting—receive timely account information at your personal computer
• Lockbox—utilize our network of post office boxes to accelerate the collection of client remittances, improving
control of your receipts in selected countries
Treasury
Bank of America Treasury Services give you the information and services required to help you get the most out of
your deposits and balances.
• SWEEP—automate the concentration of your daily excess collected balances
• Zero Balance Accounts—gain greater control of your funds by automatically transferring them between master
and subsidiary accounts on a same-day basis
• Euro Cross-Border Automated Zero Balance—concentrate your Euro currencies
• Online capabilities
• Current-day reporting
• Prior-day reporting
• ACH initiation
• Wire transfer initiation
• International U.S. dollar wires
• FX international wires.
Working Capital Management
Treasury Management has typically been charged with studying and documenting the cycles of receipts and
payments to improve return on investment portfolios and/or to reduce debt. The credit management function
involves managing raw materials, work in process, inventory and the distribution of finished goods. These are all
components of the cash flow cycle and very closely tied to one another. If one component fails or is delayed, the next
activity and all subsequent activities will suffer.
Investment/Paydown
Equity/Debt
Payables Raw Materials
Work in Progress
Receipts Inventory
Sales of goods
Distribution
Your Bank of America Treasury Management team is prepared to work with you to identify issues and discover
opportunities and solutions.
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management and Foreign Exchange Services
Client financial architecture
The focus of your Corporate Treasury staff has expanded to include overseeing the complete transaction process—
receipts, payments and treasury.
Bank of America Treasury Management officers will ask questions to gain an understanding of your core processes
so they can more easily develop and implement solutions that add value to your internal operations.
• Your Bank of America Treasury Management team will work with you to learn and understand your issues and
needs to uncover opportunities not easily recognized.
• Working as advisors, we will deliver innovative solutions, drawing from our comprehensive U.S. and
international payments, receipts, treasury and global trade capabilities to help you meet your business
objectives.
• As the #1 provider of treasury management services to middle market and large corporate clients in the United
States, we provide exceptional customer service and ongoing technological advancements.
• The Global Banking System (GBS), the backbone of Bank of America’s international banking operations, links
accounts and services through one single platform.
Risk
Receipts
Credit
Invoice
Receipts
Cash Application
Deductions Mgmt
Disputes
Collections/Loss Control
Research/Inquiries
Treasury
Cash Position
Bank Relations
Miscellaneous
Payments
Purchasing
Request for Payment
Payment Origination
Settlement
Fraud Control
Reconcilenment
Research/Inquiries
Information
Client Access Technology Strategy Information Security
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management and Foreign Exchange Services
Foreign Exchange Services
Bank of America Foreign Exchange Services Group provides the following products and services:
Worldwide trading
• Nearly thirty sales and trading centers
• Short-and long-dated forwards in all non-exotic currencies
• Non-deliverable forwards pricing in selected exotic currencies
• Standard and exotic options.
Risk analysis
• Quantitative analysis of FX exposures and hedging strategies
• Analysis and review of the risk management process
• Development of new hedging approaches and products
• Currency research and risk management monographs
Currency strategy
• Economists located on trading floors, who are responsive to market developments
• Globalmacro-economic coverage of all markets through worldwide network
• Regular publication of market research and country analysis available electronically in real-time
Other services
• Extensive series of workshops and seminars
• Full-featured capital markets Web site with instant access to research, market commentary, and risk analysis
tools
E-Solutions
Bank of America’s Global Markets Web site provides clients with valuable ideas, analyses and tools required to
manage their physical assets, liabilities and risks.
The resources available through the site include:
• Research: Market commentary, economic analysis, technical analysis, forecasts and research on practical
investment and risk management issues, such as setting foreign exchange budget rates, estimating
international costs of capital and evaluating hedging strategies
• News & information: Economic calendar hyperlinked to Bank of America research and online futures and
margin statements
• Analysis tools: TradeCalc (Options pricer), Chart Room (historical data), Portfolio Optimizer, Implied Volatility
and Daily FX rates
• Trading: FX02, an FX e-dealing service that offers spot, forward and swap transactions, online trade blotters,
confirmations and valuation reporting
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management and Foreign Exchange Services
PaymentsDirect FXWires andDrafts
Your business is increasingly global. Your operations are expanding internationally. Employees and suppliers
extend across borders. As your company changes and grows, you need the ability to make multi-currency payments
quickly, easily and cost-effectively. Bank of America FX Wires and Drafts allow you to tap the power of the internet
to manage foreign currency payments effectively.
Integrated FX platform
The Bank of America Direct® FX Wires and Drafts service allows you to issue payments—in more than 100
currencies—using the Web browser on your PC desktop.
The service makes it easy for you to make payments of up to $5 million (U.S. dollar equivalent) to suppliers,
overseas employees, international operating units, or any other beneficiary, via our state-of-the-art Web-browserbased
system.
Payment settlement is made via deductions from your Bank of America account. Since competitive foreign exchange
rates are critical, our system provides the most current rates, which are continuously updated throughout each
business day.
Benefits of FX Wires and Drafts Service
The FX Wires and Drafts Service delivers the following significant benefits:
• Intuitive pull-down menus and clear data input screens make it easy for you to complete a transaction in
minutes.
• The service is available 24 hours a day—allowing you to set up payments and review transactions on a
schedule that’s convenient for you.
• With on-site draft printing, you can print your foreign currency drafts locally and immediately.
• The service gives you robust security, using digital certificates and flexible user controls.
• You have the benefit of real-time, competitive FX rates from one of the leading FX trading operations in the
world.
• You have the added confidence that your payments are made with greater accuracy since the system
automatically provides certain standard payment information.
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management and Foreign Exchange Services
Seminars and Workshops
Foreign Exchange Workshop
• A three-day, case study-based workshop that introduces the attendees to such topics as: “Defining Foreign
Exchange Exposures,” “Settling Currency Risk Management Policies and Procedures,” “Foreign Currency
Options” and “Managing Foreign Currency Exposures”
• A one-day seminar specifically designed to cover the key aspects of the three-day seminar in a more condensed
version.
Currency Option Seminars
To complement Bank of America’s extensive capabilities in providing currency options to its clients, the Bank also
offers educational opportunities where clients can improve their understanding of option-related products and learn
to use them within an appropriate risk management framework.
Seminars include:
• Introduction to Vanilla Currency Options
• Introduction to Exotic Currency Options
• Hedging with Currency Options and the Accounting Implications
• Currency Option Risk Management
Managing risk for the MNC
This seminar is designed for the Treasury professional who desires a deeper understanding of the issues and
strategies that are necessary for managing risk for a multi-national corporation.
FAS 133
This comprehensive seminar will help Treasury and Accounting implement and maintain compliance with the new
derivatives and hedging rules. The seminar will focus specifically on new developments, including recent decisions
from the DIG and insight into future changes.
If you are interested in attending any of these seminars, please contact your Global Product Solutions officer.
Bank of america merrill lynch SolutionS for importerS
Chapter 11
International Cash Management and Foreign Exchange Services
Accounting Considerations
Accounting for Derivatives and Hedging Transactions—FAS 133 (as amended by FAS 138)
• Financial Accounting Standard No. 133 (as amended by FAS 138), effective for fiscal years starting after June
15, 2000, requires all derivatives to be shown on the balance sheet at fair value. Changes in fair value of the
hedge will go through earnings unless the transaction qualifies for special hedge accounting.
• Each operating unit determines whether it has an FX exposure based upon its functional currency. Companies
must document hedge strategies and the hedge must be highly effective to qualify for hedge accounting. Any
ineffective portion of the hedge may be charged to earnings immediately.
• Three types of hedges that qualify for special accounting are cash flow hedges, fair value hedges and net
investment hedges.
• A cash flow hedge protects against changes in the USD equivalent cash flows associated with an unrecognized
firm commitment, recognized assets or liabilities or a forecasted transaction.
• A fair value hedge protects against changes in fair value of an FX-denominated unrecognized firm
commitment, a recognized asset or liability or an available-for-sale security.
• A net investment hedge protects the USD equivalent net asset position of a foreign currency functional
subsidiary.
• Hedges of business combinations, inter-company dividends and anticipated exposures that are not probable do
not receive special hedge accounting.
Cash Flow Hedge Accounting
The fair value of the hedge is recorded on the balance sheet as an asset or liability and the effective portion of the
hedge is offset in equity (Other Comprehensive Income). The balance in equity is released to income as the hedged
item affects earnings (i.e., when forecasted transaction occurs or when sport/sport changes of balance sheet items
are recognized).
Fair Value Hedge Accounting
The fair value of the hedge is recorded on the balance sheet as an asset or liability with the offset in income. The
carrying value of the underlying hedged item is also adjusted with the offset in income as well.
Net Investment Hedge Accounting
The fair value of the hedge is recorded on the balance sheet as an asset or liability with the offset in the cumulative
translation account CTA (equity). The change in value of the foreign subsidiary net asset position is also adjusted to
CTA.
Please note that Bank of America Corporation is not an accounting advisor. Please consult with your auditors to
determine the appropriate accounting treatment for your company.
Bank of america merrill lynch SolutionS for importerS
0119Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 12
International Trade Glossary
0119Bank of america merrill lynch SolutionS for importerS
Bank of america merrill lynch SolutionS for importerS
Chapter 12
International Trade Glossary
Chapter 12
International Trade Glossary
acceptance. A time draft that the drawee (the payer) has accepted and acknowledged in writing the unconditional
obligation to pay it at maturity.
accepting Bank. A bank that is the drawee of a time draft and that becomes the acceptor of the draft.
account party. (See Applicant.)
advising Bank. A bank which receives a letter of credit issued by the applicant’s bank and forwards it to the
beneficiary without assuming any responsibility or liability other than to ensure their advice accurately reflects the
terms and conditions of the credit (and to verify the credit’s authenticity).
at xx days after date. A term used to indicate that the maturity date of a draft is determined by the date on which it
was drawn and is not determined by the date of acceptance by the drawee.
at xx day after sight. A term indicating that the maturity date of a draft is determined based on a specified number of
days after presentation of the draft to the drawee or payee.
air Waybill. A transport document/bill of lading which serves as a receipt for goods, (contract to transport the goods,
and which indicates to whom the goods are to be delivered). Generally, air carriers do not allow Air Waybills to be
issued in negotiable form. Air Waybills should not be consigned to order of a named party, but should be consigned
directly to a named party.
all risks coverage. The broadest type of standard marine insurance coverage; may show exclusions for damage
caused by war, terrorism, strikes, riots and civil commotion.
alongside. Place that is at the side of the vessel. Goods to be delivered alongside are to be delivered to the dock from
which they can be loaded aboard the ship.
applicant. The buyer/importer/account party who applies to its bank to issue a letter of credit in favor of the
beneficiary/seller/exporter.
at Sight. The tenor of a draft or availability term of a credit indicating that payment is due upon presentation or
demand.
aval. A time draft drawn by an exporter on the buyer under which the buyer’s bank has guaranteed that the draft
will be paid at maturity.
Banker’s acceptance. A time draft drawn on a bank, usually by an importer or exporter, which, once accepted by the
drawee bank, becomes an unconditional obligation of the bank to pay at maturity.
Beneficiary. The person or company in whose favor a letter of credit is issued. Usually the beneficiary is the seller/
exporter.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
Bill of exchange. (See Draft.)
Bill of lading. A transport document which serves as a receipt for goods, a contract to transport the goods, and
engagement to deliver the goods at the prescribed destination to the lawful holder of the bill of lading. While this
term is frequently used to describe an ocean/marine bill of lading, its legal definition is much broader. (See also, Air
Waybill, Ocean Bills of Lading, Inland Bills of Lading.)
Boycott. A refusal to deal commercially with a person, firm, or country.
carnet. A customs document that permits the holder to temporarily bring goods into a country (e.g. for a trade
show), and then take them back out without having to pay customs duties.
cash in advance. The payment by a buyer to a seller prior to the purchased goods having been shipped.
cash against Documents. (See Documents Against Payment.)
central Bank. A government-owned or controlled bank that oversees other banks in the nation, issues currency, and
serves as a depository for government funds.
Certificate of Analysis. A certificate issued regarding the quality and composition of food products or
pharmaceuticals.
Certificate of Inspection. A document certifying that merchandise was in good condition immediately prior to its
shipment.
Certificate of Origin. A document, often issued by a Chamber of Commerce, certifying the origin of the goods being
shipped. It is used to satisfy import regulations and to determine customs duties.
clean transport Document. A transport document that bears no clause or notation, indicating that goods were
received in apparent good order and were not damaged or had other irregularities.
clean Draft. A draft to which no shipping documents are attached.
commercial invoice. A document issued by a seller listing goods being sold to a named buyer, including the price and
shipping terms.
Confirmed Letter of Credit. An obligation assumed by one bank (the confirming bank) on behalf of the issuing bank, of
a letter of credit under which the confirming bank undertakes to honor or negotiate drafts and/or documents which
are presented in compliance with the credit’s terms and conditions.
consignee. The person or firm named in a freight contract to whom merchandise is to be delivered.
Documentation differentiates between an intermediate consignee and an ultimate consignee for export control
purposes.
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Chapter 06
Documentary Collection for Importers
consular invoice. A commercial invoice that has been reviewed by the Consulate of the buyer’s country for the
purpose of verifying the value and quantity of the shipment and to ensure that no indigenous laws or regulations
are being broken.
container. A uniform-sized, sealed, reusable metal box in which goods are shipped by vessel, truck, rail or air.
Country Risk. The risks inherent in doing business in a foreign country over and above commercial risks, which are
generally beyond the local company’s ability to control.
credit risk insurance. Insurance purchased through either the Export-Import Bank of the United States, or private
sector companies, to provide protection against non-payment due to country or commercial risks.
customs. National government authorities that regulate the flow of goods to or from a country and collect duties
levied on imports and exports.
customhouse Broker. A private firm that arranges to clear goods through customs. Customhouse brokers also
commonly act as freight forwarders.
Demurrage. Additional storage charges incurred as a result of excessive delays in clearing cargo off a vessel, wharf,
freight car or air cargo facility.
Devaluation. The official lowering of a country’s currency in relation to one or more currencies of other countries. It
tends to make imports in that country more expensive, and to make exports more attractively priced to overseas
buyers.
Discharge. To unload cargo.
Dock Receipt. A receipt for goods issued by an ocean carrier or their agent at their dock or warehouse, but not
covering the loading on a vessel.
Documentary collection. The presentation through banking channels for payment or acceptance by a buyer of
documents relating to the shipment of goods.
Documents against acceptance (D/a). A documentary collection wherein shipping documents are released to buyers in
exchange for them obligating themselves to future payment via execution of a trade acceptance. (See also Aval.)
Documents against payment (D/p). A documentary collection wherein shipping documents are released to the buyer in
exchange for payment for the amount of the draft.
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Chapter 06
Documentary Collection for Importers
Draft. An unconditional order in writing from drawer (exporter) to drawee (importer) directing the drawee to pay a
specific amount of money to the payee on demand or at a fixed or determinable future date. (See also, Sight Draft,
Time Draft.)
Drawee. The person, company or bank upon which a draft is drawn.
Drawer. The person, company or bank that creates the draft and generally is entitled to receive payment.
Durable Goods. Furniture, machinery, appliances and similar goods that are not processed or consumed by their
users.
Duty. A tax on imported goods imposed by the customs authorities in that country.
economic Sanctions. A foreign policy tool used to punish and/or influence a target nation. Sanctions can include
prohibiting trade, economic assistance, financial transactions or even all economic relations.
embargo. A restriction or prohibition on exports or imports with respect either to specific products or specific
countries.
exchange rate. The value or price of one currency when used in relation to its value in another currency, for example,
the number of units of currency A that is required to be exchanged for one unit of currency B.
exim-Bank. The U.S. Export-Import Bank. The U.S. Eximbank is an independent agency that finances the export of
U.S. goods and services through loans, guarantees, working capital guarantees and insurance.
exporter. The person or company that sells or arranges to transport goods out of a country.
export license. A government document used in some countries that allows the export of certain controlled products
to specific destinations.
export management company. A private firm that serves as the export department for a number of companies. The
firm typically do not take title to the goods and is paid on a commission basis.
export trading company. A firm that serves as the export department for a number of companies that takes title to
the goods. They make their money by making a profit margin on the goods being exported.
force majeure. Conditions such as floods, earthquakes, hurricanes or other events beyond the control of various
parties involved in transporting goods. Marine contracts typically exempt the affected parties from their
contractual obligations as a result of Force Majeure.
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Chapter 06
Documentary Collection for Importers
foreign exchange. The currency of a foreign country and/or the conversion from one currency to another.
forward exchange. The setting of an agreed-upon exchange rate between a foreign exchange trader and a client
whereby the trader contracts with the client to buy/sell a specific amount in foreign currency at a future date at a
predetermined exchange rate. (See also, Spot Exchange.)
foul (not clean) Bill of lading. A receipt for goods issued by a carrier with an indication that the goods or the
packaging were in damaged condition when received.
free (foreign) trade Zone. An enclosed and secured area, usually designated by a port, into which goods may be taken
and customs duties may be deferred or waived until such time as the goods are removed for domestic distribution or
re-exported.
freight forwarder. A private company that arranges cargo space on a carrier, as well as the logistics for delivering
the goods to the carrier (e.g. ship, airplane etc.). They also frequently assist in the preparation of shipping
documents for presentation, either under a letter of credit or collection basis.
free of particular average (fpa). A clause used in marine insurance indicating that partial loss or damage to a
shipment is not covered. Loss resulting from conditions such as the ship sinking or burning may be exempted from
the clause. (See also, With Particular Average.)
Gatt. “General Agreement on Tariffs and Trade.” A multilateral treaty designed to reduce trade barriers, and to
provide a forum for resolution of trade disputes.
General export license. Authority to export without the need for a specific or validated export license.
Gross Weight. The full weight of a shipment, including goods, packaging and container.
import. To bring goods into a country whose origin is in another country. The importer is usually the buyer or the
buyer’s agent.
import license. A government document required in some countries for importing specific goods originating in
specific countries.
incoterms. International rules published by the International Chamber of Commerce for the interpretation of foreign
trade terms.
inland Bill of lading. A bill of lading used to cover the transport of goods within a country’s borders, such as by rail or
truck.
Insurance Policy/Certificate. A document that assures the consignee that the merchandise is insured to cover loss or
damage while in transit.
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Chapter 06
Documentary Collection for Importers
international chamber of commerce (icc). An organization founded to promote free trade and private enterprise and
to represent business interests at the national and international level. The ICC is composed of national councils
from over 90 countries.
issuing Bank. The bank that issues a letter of credit; also called the opening bank.
Letter of Credit. A conditional undertaking by a bank on account of a buyer (applicant) of goods in favor of a seller
(beneficiary) under which payment is effected against presentation of stipulated documents in compliance with the
letter of credit’s terms and conditions.
marine risk insurance. Insurance covering loss or damage while goods are at sea. Typical coverage includes losses
sustained due to fire, shipwreck, piracy, strikes, riots or civil commotion, as well as the standard losses caused as a
result of the cargo being damaged.
marks. Letters, numbers or symbols used on packaging so as to identify the cargo.
Marks of Origin. Physical markings on a product indicating the country where the merchandise was produced.
mercoSur (mercado comun del Sur—Southern cone common market). A preferential trade agreement among countries
of the southern cone of South America that aims to establish free trade and increased economic cooperation among
members.
most-favored-nation treatment. A commitment that a country will extend to another country the lowest tariff rates
or the most favorable non-tariff policies it applies to any third country. All GATT contracting parties undertake to
apply such treatment to each other.
multimodal transport. The movement of freight using two or more different kinds of transport such as ocean and
truck, ocean and rail etc. (May also be called combined transport bill of lading, intermodal bill of lading or through
bill of lading)
nafta (north america free trade agreement). A regional preferential trade agreement that aims to eliminate tariffs
and other trade, services and investment barriers among its constituents.
naicS code. The North American Industry Classification System—the industry classification system used by the
statistical agencies of the United States
net Weight. Weight of the goods with any immediate wrappings.
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Chapter 06
Documentary Collection for Importers
ocean Bill of lading. A document issued by a shipping line that serves as (a) a receipt for goods, (b) a contract to
transport goods, and (c) a means to transfer title from the shipper to a designated party. Most often, the carrier will
issue three original bills of lading. Ocean bills of lading may either be “negotiable” or “straight.” Under a negotiable
bill of lading, one original bill of lading must be surrendered to the shipping line in order for the consignee to
take delivery. The bill of lading is consigned to the order of a named consignee. Ownership in the goods may be
transferred through endorsement of the bill of lading. Under a straight bill of lading, the consignee may take
delivery by surrender of either an original or copy of the bill of lading or in some instances by simply proving their
identity. Straight bills of lading are consigned to a consignee with no possibility of transferring ownership through
endorsement.
open account. A selling arrangement whereby goods are shipped to a buyer prior to payment being made, and where
the seller’s risk is entirely with the buyer and the buyer’s country.
open insurance policy. A marine insurance policy that applies to all shipments over a period of time rather than on a
single shipment.
opening Bank. The bank that issues the letter of credit. Same as issuing bank.
opic. Overseas Private Insurance Corporation. AU.S. government agency that provides risk protection on capital
investments made in foreign countries.
packing list. A document that lists the various packages or cartons being shipped and their contents.
particular average. Partial loss or damage to goods.
Phytosanitary Certificate. A certificate typically issued by a country’s agricultural department to satisfy import
regulations in various countries certifying that specified perishable food, weed and plant items are free from
contamination, pests and plant diseases.
pro-forma invoice. A draft or sample of what the final invoice will look like. Used by sellers in the negotiating process
with potential buyers in order to ensure that all parties understand what costs are included in the quoted price.
purchasing agent. An agent who purchases goods on behalf of a foreign buyer.
Quota. A limitation placed by a government on the quantity of specific goods that may be imported or exported
without the imposition of additional customs duties.
rate of exchange. The value of one country’s currency in terms of another.
Shipper’s export Declaration (SeD). A U.S. Treasury form required to be completed for all shipments leaving the
United States. It indicates the value, nature of the goods, weight, destination, etc. It is not an export license. Very
few products leaving the United States require an export license.
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Chapter 06
Documentary Collection for Importers
Shipping Weight. The gross weight of a shipment, including moisture content, wrappings, crates, boxes and
containers (other than cargo vans and similar substantial outer containers).
Sight Draft. A draft which is payable by the drawee at the time of presentation. (See also, Draft, Time Draft.)
Spot exchange. The immediate conversion of one currency to another at the prevailing exchange rate.
(See also, Forward Exchange.)
SIC Codes (Standard Industry Classification). A numerical coding system formerly used in the United States to classify
various types of businesses, goods and services. Replaced by NAICS Code.
tare. Weight of the package in which merchandise is contained and/or packing materials used to protect it. Gross
weight minus tare gives net weight.
tenor. Terms fixed for payment of a draft; e.g., sight, 90 days after sight, 60 days after shipment date.
through Bill of lading. See multimodal transport document.
time Draft. A draft which is payable at a determinable future date. It is drawn on a buyer (importer) or bank and,
once signed as accepted by the drawee becomes the drawee’s obligation to pay at maturity.
(See also, Trade Acceptance.)
trade acceptance. A time draft that has been accepted across the face of the instrument, in writing, by the drawee
(generally the buyer/importer) thus signifying the drawee’s undertaking to honor the acceptance at maturity. (See
also, Documents Against Acceptance.)
ucp (uniform customs and practice for Documentary credits). Globally accepted (by all member nations of the
International Chamber of Commerce) set of rules governing letter of credit transactions.
Warehouse receipt. A receipt issued by a warehouse operator for goods received for storage.
With average. A Marine Insurance term meaning that a shipment is protected from partial damage whenever the
loss exceeds a stipulated percentage.
Bank of america merrill lynch SolutionS for importerS
Chapter 06
Documentary Collection for Importers
BARREL =
36 British Imperial gallons
9987.12 cubic inches
BOARD FOOT =
144 cubic inches
2360 cubic centimeters
BUSHEL =
2150.42 cubic inches
35.2390 liters
CARAT =
200 milligrams
3.0865 grains
CENTIARE (square meter) =
10.764 square feet
1.196 square yards
CENTIMETER =
0.3937 inch
CORD =
128 cubic feet
3.625 cubic meters
DRAM (fluid) =
60 minims
3.697 milliliters
4 grams (approx.)
GALLON (U.S.) =
231 cubic inches
4 quarts
8 pints
3.785 liters
128 fluid ounces
GALLON (British Imperial) =
277.42 cubic inches
1.201 U.S. gallons
4.546 liters
Table of Weights and Measures
GRAIN = OUNCE, FINE =
0.00014 pound avoirdupois troy ounce
0.0648 grams 480 grains
31.104 grams
GRAM =
15.43 grains POUND =
0.0353 ounce 16 ounces
0.0022 pound 7000 grains
454 grams
HUNDREDWEIGHT (British) = 0.454 kilogram
112 pounds 14.58 troy ounces
50.80 kilograms
QUARTER (British) =
KILOGRAM = Quarter hundredweight
2.2046 pounds 28 pounds
35.274 ounces 12.68 kilograms
15432.36 grains
0.0011 short ton QUINTAL =
0.00098 long ton 100 kilograms
220.46 pounds
LITER =
1.000027 cubic decimeter STERE =
0.2642 gallon 1 cubic meter
1.057 quarts
61.02 cubic inches STONE (British) =
0.035 cubic foot 14 pounds
33.8147 fluid ounces 6.35 kilograms
270.518 fluid drams
TON (short) =
METER = 2000 pounds
39.37 inches 907 kilograms
3.28 feet
1.09 yards TON (long) =
2240 pounds
OUNCE 1016 kilograms
(Avoirdupois, ordinary) =
437.5 grains TON (metric) =
0.911 troy ounce 1000 kilograms
0.0000279 long ton 2204.62 pounds
28.3495 grams
OUNCE, FLUID =
1.805 cubic inches
29.58 milliliters
Bank of america merrill lynch SolutionS for importerS
©2009 Bank of America Corporation.
AA AE 0890ED 05 2008 050071
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