LC SWIFT Format: Field 20 (Documentary Credit Number)

Next MT700/701 field is field 20, Documentary Credit Number. This field is a self explanatory field. Every LC issued by the issuing bank must bear an ‘identity’ which is recognizable by the LC number. This LC number is a unique number assigned to an LC where every LC issued bears a different LC number.

LC number or identity is normally computer generated or in some banks the number is manually assigned by the issuing bank. It is a combination of alphabet and numeric characters subject to a maximum of 16 characters. The presence of this field is mandatory.

This number will be used as a reference number for payment, enquiry and amendment, if there is any which refers to that same LC. It carries important implications to the whole LC operations. There are cases where multiple LCs issued by the same issuing bank, at the request of the same buyer, addressed to the same seller, with the same amount and same currency. Therefore, the only way to identify which LC is to be paid, accepted or negotiated is by identifying the LC number.

Field 31C (Date of issue) on the other hand, signifies the date on which the LC is issued by the issuing bank. The undertaking to make payment by the issuing bank takes effect from this date. This field must contain 6 numeric characters only with no alphabet in the following manner, yy/mm/dd. For example, if the date is indicated as 070104, it is read as January 04th, 2007.

This date format is also applied to field 31D (Date and place of expiry) and field 44C (Latest date of shipment).

LC SWIFT Format: Field 40A (Form of Documentary Credit)

The second field in MT700/701 is field 40A. This is also a mandatory field where it must present and must be expressly stated to indicate the form of the Documentary Credit or LC. This field must contain one of the following codes:

IRREVOC TRANS STANDBY – The standby letter of credit is irrevocable and transferable

IRREVOCABLE – The documentary credit is irrevocable

IRREVOCABLE STANDBY – The standby documentary credit is irrevocable

IRREVOCABLE TRANSFERABLE – The documentary credit is irrevocable and transferable

REVOCABLE – The documentary credit is revocable

REVOCABLE STANDBY – The standby documentary credit is revocable

REVOCABLE TRANSFERABLE – The documentary credit is revocable and transferable

Article 3 of UCP600 stated that “…a credit is irrevocable even if there is no indication to that effect”.

This article says that, if none of the above codes are expressly indicated in field 40A of the SWIFT format, the LC is deemed irrevocable. Since field 40A is a mandatory field, it is a practice by banks worldwide to expressly indicate a code under this field. Article 3 of UCP600 is merely discouraging the practice of issuing a revocable LC to protect the interest of the seller. But this does not however, prohibits the practice of issuing a revocable LC. By virtue of article 1 which says, “…they are binding on all parties thereto unless expressly modified or excluded by the credit”.

This article allows both parties to modify or exclude some or part of the articles where a revocable LC may be an option.

LC SWIFT Format: Field 27 (Sequence of Total)

As I mentioned in the previous post, LC is a message containing ‘to do list’, information, instruction which forms what is called terms and conditions. As LC is practiced worldwide, the terms and conditions expressly indicated must be arranged in a systematic order so as not to raise any misunderstanding and confusion. Therefore, they are arranged in a sequence order applied worldwide in a format developed by Society for Worldwide Interbank Financial Telecommunication or in short, SWIFT. LC messages travel from bank to bank electronically and finally delivered to seller in hard copy. There are various SWIFT Message Types (MT) used for a different purposes:

Category 0 – Financial System Messages
Category 1 – Customer payments & Cheques
Category 2 – Financial Institution Transfers
Category 3 – Treasury
Category 4 – Collection & Cash Letters
Category 5 – Securities
Category 6 – Treasury Markets
Category 7 – Documentary Credits & Guarantees
Category 8 – Travellers Cheque
Category 9 – Cash Management & Customer Status

LC is issued using MT category 7, which is specifically known as MT700/701 comprising an assigned sequence ‘fields’.

The first field of MT700/701 is field 27 (sequence of total). This field requires only number or figure to be indicated without alphabet and this field is a mandatory field. In other words, it must present and must be indicated. This field represents number of message and total number of messages.

For example, if 1/1 is indicated, it means that this is the only message in one page. 1/2 indicates that this is the first message of a total of 2 messages. In this case, the receiving bank must ensure that it receives both of the messages marking 1/2 and 2/2 under field 27. This is very important because LC carries monetary value and failure to receive all messages would caused unnecessary problem. In some instances, the message can be more than 3 pages.

Part Four: Sample of LC issued (SWIFT Format)

27 : Sequence of Total
1 / 1

40A : Form of Documentary Credit
IRREVOCABLE

20 : Documentary Credit Number
LOC2897000203

31C : Date of Issue
071015

40E : Applicable Rules
UCPURR LATEST VERSION

31D : Date and Place of Expiry
071114 UNITED KINGDOM

50 : Applicant
DAMAS ENTERTAINMENT LTD
LOT 19 - 2 MEDAN SETIA SATU
PLAZA DAMANSARA, BUKIT DAMANSARA
50490 KUALA LUMPUR, MALAYSIA

59 : Beneficiary
CLOWN STATION DIRECT LTD
MERROW BUSINESS CENTRE
GUILDFORD SURREY GU8 9WA
UNITED KINGDOM

32B : Currency Code; Amount
GBP 20,151-23

41D : Available With...By...
ANY BANK
BY NEGOTIATION

42C : Draft At...
SIGHT

42D : Drawee
ISSUING BANK

43P : Partial Shipment
NOT ALLOWED

43T : Transshipment
ALLOWED

44E : Port of Loading / Airport of Departure
ANY AIRPORT IN UNITED KINGDOM

44F : Port of Discharge / Airport of Destination
KUALA LUMPUR INTERNATIONAL AIRPORT, MALAYSIA

44C : Latest Date of Shipment
071031

45A : Descr of Goods / Services
MULTIMEDIA PRESENTATION SYSTEMS AS PER PROFORMA INVOICE NO 097/07 DATED 20TH JANUARY 2007 (F.C.A)

46A : Documents Required
FOLLOWING DOCS REQUIRED IN TRIPLICATE UNLESS OTHERWISE STATED
+2 COPIES OF BENEFICIARY’S DRAFT AT SIGHT MARKED DRAWN UNDER ZEALOT BANK LTD IRREVOCABLE DOCUMENTARY CREDIT NUMBER LOC2897000203
+SIGNED COMMERCIAL INVOICE
+CLEAN AIR WAYBILLS INDICATING CREDIT NUMBER LOC2897000203 CONSIGNED TO ZEALOT BANK LTD MARKED FREIGHT TO COLLECT AND NOTIFY APPLICANT
+PACKING LIST
+CERTIFICATE OF UNITED KINGDOM ORIGIN
+BENEFICIARY’S CERTIFICATE OF ASSURANCE

47A : Additional Conditions
+A DISCREPANCY FEE OF USD20-00 / MYR50-00 WILL BE DEDUCTED FROM THE PROCEEDS IF DOCS ARE PRESENTED WITH DISCREPANCY/IES AND ACCEPTANCE OF SUCH DOCS PRESENTED WITH DISCREPANCY/IES WILL NOT IN ANY WAY ALTER THE TERMS AND CONDITIONS OF THIS CREDIT
+GOODS TO BE SHIPPED BY AIRLINER APPOINTED BY THE GOVERNMENT OF MALAYSIA. CERTIFICATE OF APPOINTMENT FROM THE GOVERNMENT OF MALAYSIA TO BE SUBMITTED FOR NEGOTIATION

71B : Charges
ALL CHARGES OUTSIDE MALAYSIA ARE FOR ACCOUNT OF BENEFICIARY

48 : Period of Presentation
DOCS TO BE PRESENTED WITHIN 14 DAYS AFTER THE ISSUANCE OF THE SHIPPING DOCS BUT WITHIN THE VALIDITY PERIOD OF THE CREDIT

49 : Confirmation Instruction
WITHOUT

78 : Instruction to Pay / accpt / nego Bank
+AMOUNT OF NEGOTIATION MUST BE ENDORSED AGAINST THIS CREDIT
+ALL DOCS TO BE AIR COURIERED IN ONE LOT TO ISSUING BANK, ZEALOT BANK LTD, NO 47 & 49 JALAN BAHAGIA, TAMAN TUN DR ISMAIL, 60000 KUALA LUMPUR, MALAYSIA
+UPON RECEIPT OF DOCS IN STRICT COMPLIANCE WITH THE TERMS AND CONDITIONS OF THIS CREDIT, WE SHALL REMIT PROCEEDS AS PER YOUR DISPOSAL INSTRUCTION

I will explain details of each terms and conditions in the next post.

Part three: Responsibility of the issuing bank

The issuing bank, as mentioned in the previous post, is a bank which issues the LC at the request and on the instruction of the buyer. The issuing bank, in most cases is the bank of the buyer where he maintains banking relationships. Prior to giving the instruction to issue the LC, buyer and seller had concluded a sales agreement or contract and agreed to settle the trade payment using LC.

In the LC operations, other than the buyer, seller and issuing bank, there are other banks involved such as advising bank, nominated bank and in some instances, confirming bank. The issuing bank is the ‘anchor’ bank, the last bank in the line of banks, which holds the definite undertaking to pay and the final destination where the documents must reach, before they fall in the hand of the buyer.

The main responsibility of the issuing bank is to make payment, either directly to the seller or to reimburse the bank which had made the payment to the seller.

The seller, upon shipment of the goods, presents the documents to his bank. His bank may or may not pay him for the value of the documents depending on whether or not his bank is expressly nominated by the issuing bank to make payment. Even if his bank is expressly nominated by the issuing bank to make payment, this does not mean that his bank holds the ‘definite undertaking’ to pay. Meaning, his bank may refuse to pay and send the said documents to issuing bank for payment. Upon receipt of the same, the issuing bank will examine the documents to ensure compliance. When the issuing bank is satisfied, payment will be remitted for the credit of the seller’s account via his bank.

If, however, the seller’s bank agrees to make payment against the documents to the seller, the seller’s bank will credit the amount into his account. The documents than, will be sent to the issuing bank for final examination. Upon receipt of the said documents and in compliance with the terms and conditions of the credit, the issuing bank will remit the payment for the credit of the seller’s bank, being reimbursement of the amount paid to the seller.

In any event, either the nominated bank pays to the seller or not, the issuing bank must honour its undertaking to pay provided that the documents are in compliance with the terms and conditions of the credit. The issuing bank is also responsible to examine the document within the stipulated time to decide whether or not the documents are in compliance.

Part two: Letter of Credit defined

What is letter of credit? To understand what letter of credit is, we should first know the standard international rules that governed the operation of letter of credit which is known as Uniform Customs and Practice for Documentary Credits or in short, UCP.

The current UCP is known as Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no 600 or in short, UCP600. This is the sixth revision of the rules since they were first circulated in 1933. The primary objective of UCP is to alleviate the confusion caused by individual countries’ promoting their own national rules on letter of credit practice. UCP was established to create a set of contractual rules that would establish uniformity so that practitioners would not face national regulations conflict.

Under the current UCP600, letter of credit is defined in article 2 which reads as follow:

“Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation…”

In international trade community, letter of credit is known as ‘credit’ or popularly known as ‘LC’. There are few important criteria need to be highlighted from the definition above because they form the basic principle of letter of credit.

Irrevocable – In letter of credit transaction, they are three important parties involved namely, bank, buyer and seller. The letter of credit is issued by a bank which is known as ‘the issuing bank’ which acts on the instruction or at the request of the buyer. The buyer is the party who provides the instruction to the bank via a standard format form. Based upon the instruction or application form received from the buyer, the issuing bank issues the letter of credit to the seller.

Irrevocable here means, in any event, should any of the parties; buyer, seller or bank wishes to cancel the LC that has been issued by the issuing bank, a mutual agreement or consent in writing must first be obtained from the rest of the parties involved in the transaction. In the absent of such agreement or consent in writing, the LC cannot be cancelled or revoked and it stands as an operative instrument.

The LC, once issued, is said to be a definite undertaking of the issuing bank where it encapsulates the ‘guarantee’ or ‘promise’ of the issuing bank to the buyer that payment will be made to the seller. This ‘guarantee’ or ‘promise’ to make payment to the seller by the issuing bank is based on the presentation of the documents (invoice, packing list, Bill of Lading/Air waybill etc) within the stipulated time period as expressly stated in the LC by the seller. Failure to comply with the requirements (terms & conditions) of the LC, the seller would not entitled to the ‘guarantee’ or ‘promise’ of the issuing bank or in other words, he would not get his payment.

This is the first important basic principle on which the LC operates.

Understanding Letter of Credit for beginners (Part One)

In trade transaction, there are two main objectives to be achieved; consideration for payment and consideration for the goods. Buyer wants to be assured that he received his goods and on the other hand, the seller would like to ensure that he would receive the value for his goods.

Let say, Sharif is a small trader in Malaysia operating his business in a shop lot in Kuala Lumpur selling canned food. He wants to buy a large quantity, one full container load (FCL) of canned sardine from Abdul, who is a food manufacturer residing in Singapore.

Shariff informs Abdul that he will list down important details like quantity of the canned sardine, brands, the place to deliver, time to deliver, amount and so on to show his intention to buy and to engage in this trade. The total value is, say, USD100,000.00. Abdul on the other hand, needs some time to prepare the delivery where he needs to process the sardine, to label the can, to pack and to contract for the transport before the goods can be delivered.

Now, there is one major problem. How can Abdul be sure that this list is coming from Shariff and Sharif would honour his word to pay him for USD100,000.00?

To ensure that this request is genuine and not a fake order, Abdul requires a third party, a bank, the organization recognized by law to give a confirmation or some kind of guarantee to ensure that Sharif would take the delivery of the goods on the agreed date and pay him the agreed amount. Without this confirmation or a guarantee by a bank, Abdul would refuse to prepare the goods for deliver.

So, Sharif goes to his bank, Maybank, and discusses this matter with his bank. His bank agrees to provide confirmation as well as a guarantee to Abdul provided that Shariff deposits USD100,000.00 equivalent sums with Maybank. Sharif agrees and hands over the list he made to Maybank and requests Maybank to issue the same instruction to Abdul in Singapore.

Maybank prepares the list based on the list which Sharif made with the inclusion of a few additional instructions where among others, Abdul is required to produce documentary evident for the delivery and how to obtain his payment. This list is sent through Abdul’s Bank in Singapore, DBS Bank. Upon receipt of the same, DBS Bank notifies Abdul and hands over the said list to him incorporating a guarantee for payment from Maybank.

Having received this list from Maybank in Malaysia, Abdul is assured that he will receive his payment from Maybank, not from Sharif provided that documentary evident must be sent to Maybank as evident that the delivery has been made on the agreed date to Sharif.

Upon making of the delivery, he sends the required documents to DBS Bank where they will be sent to Maybank for examination and when all the documents are presented as required, Maybank will debit Sharif’s account for USD100,000.00 and pay to Abdul through DBS Bank in Singapore.

Upon remittance of the money, Maybank will deliver the said documents to Sharif to enable him to collect the goods and pay the necessary duties and taxes.

The list issued by Maybank to Abdul through DBS Bank is called Letter of Credit. It contains the details like issuing date, expiry date, name of the buyer, name of the seller, address of both buyer and seller, type of goods, amount, documents required, shipment date, place of delivery and other important details related to this particular trade. All these details which are expressly stated are called ‘terms and conditions’.

In layman term, a Letter of Credit is a piece of list or letter incorporating terms and conditions for the seller to fulfill in order for him to obtain payment for goods he sold to the buyer.