guide to letter of credit

AGuidetoInternationalTradeandLettersofCreditMichaelJ.SchellerSterlingNationalBankInternationalBankingDivision5007thAvenueNewYork,NY10018Phone:[phone]email:[e-mail]’sInternationalBankingDivision,whereheisresponsibleforallInternationalBankingActivities.HeisalsoPresidentofSterlingNationalAsiaLimited,aHongKongtradeservicecompanyestablishedJuly2,2001.PriortojoiningSterlingin1997,hewasVicePresidentofMidlanticNationalBank’sInternationalDivision.Inthiscapacity,hewasresponsibleforalltradeservice-relatedproductsprovidedbytheBank.PriortojoiningMidlanticin1975,hewasemployedbyRepublicNationalBankofNewYorkandCitibankintheFundsTransferareaoftheirInternationalDepartment.Mr.SchellerisagraduateofBaruchCollege,CityUniversityofNewYork,andtheAmericanInstituteofBankingSchoolofInternationalBankingattheUniversityofColoradoatBoulder.HeisamemberoftheBankersAssociationforFinanceandTrade,andwasaninstructorfortheAmericanInstituteofBanking,teachingcoursesininternationalbankingandlettersofcredit.AboutTheAuthor©2008SterlingNationalBank2Introduction31DefiningTheObjectivesOfExportersandImporters42TheDocumentsOfInternationalTrade53PaymentAlternativesInInternationalTrade84TheLetterOfCredit125ApplyingForALetterOfCredit166ResponsibilitiesOfTheExporter187PaymentRequisitesandProcedures198ExhibitsExhibit1CommercialInvoice22Exhibit2MarineBillofLading23Exhibit3AirWaybill24Exhibit4CommonCarrierBillofLading25Exhibit5InsuranceCertificate26Exhibit6Draft27Exhibit7BankersAcceptance27Exhibit8LetterofCredit28-299Glossary30TableofContents3Mostnationsareunabletosatisfyalltheirneedsforrawmaterials,manufacturedgoodsandserviceswithintheconfinesoftheirterritorialborders.Excessesaswellasdeficiencieshavealwaysexistedthroughouttheworldcommunity,creatingtheneedforworldtrade.Countlessjobsandeconomicstructuresaroundtheworlddependontheabilityofnationstotradeactivelyintheinternationalmarketplace.Thetradecyclebeginswiththeagreementtotrade.Whenpartnersagreetotrade,merchandiseisexchangedforpayment.Intheinternationalmarketplace,theexportersgoalsaretobeassuredofpaymentandtofreecapitalinvestedinmerchandiseduringshipping.Fortheimporter,theguaranteeofdeliveryofmerchandiseandtheabilitytodeferpaymentareofparamountconcern.Asalescontractshouldbewrittentocoverthetermsofsale.Thearrangementforpayment,however,reliestoagreatdegreeontherelationshipbetweenthetradingpartners.Atthefoundationofeveryinternationaltradingrelationshipistrust.Insomecases,theleveloftrustbetweenimporterandexporterisbasedonanintimateknowledgegainedthroughahistoryofsuccessfultransactions.Inothers,thattrustisenhancedbytheroleofabankasintermediarytothetransactionandonadherencetouniversallyacceptedstandardsoftrade.Thesestandardscallforthecarefuldocumentationofthetitle,movementandpossessionofthemerchandise.Itisimportanttorealize,howeverthatthedocumentsoftradedonotprovideprotectionagainstfraud.Theimporter,therefore,shouldcarefullyevaluatetheexporter’sreputationandhaveaclearunderstandingoftherequirementsdetailedinthesalescontract.Asaresponsiblethirdpartytointernationaltrade,thebankexpeditespaymentandhandlesthesettlementprocess.Thebankfillsavitalrolethatmayresultfromlackofexperience,geographicdistanceandmarketunfamiliarity.Inthe1900's,theneedtoestablishstandardizedoperatingproceduresininternationaltransactionswasrecognized.ThisneedbroughtabouttheestablishmentoftheInternationalChamberofCommerce(ICC).TodayexportersandimporterscontinuetorelyonprinciplesoftheICC.TheseincludetheUniformCustomsandPracticeforDocumentaryCredits(ICC)PublicationNo.600,mostrecentlyrevisedin2007andtheUniformRulesforCollectionPublicationNo.522revisedin1995.Centraltomanyinternationaltradetransactionsistheletterofcredit,alsoknownasadocumentarycredit.Forcenturiescommerciallettersofcredithavebeenusedbyexportersandimportersthroughouttheworldtofinancetheexchangeofgoodsandservices.Commerciallettersofcreditareanimportantbankingservicedesignedtomeetthefinancingneedsofbothbuyersandsellers.Theletterofcreditisatradefinancetoolissuedbyabankattherequestofanimporter.Itguaranteespaymenttotheexporterprovidedthathesatisfiestheconditionsintheletterofcredit.TheUseofThisGuideSterlinghascreatedthisreferencesourceasaguideforcompaniesandindividualsnewtotheinternationalmarketplaceandthosewhoarealreadyacquaintedwiththefundamentals.Thefollowinginformationwillacquaintthereaderwiththeterminologyoflettersofcreditandvariousotherpaymentoptionsthatareneededforanybusinessconsideringinternationaltradeactivity.Sterlingstronglyrecommendsthatprofessionalcounselandorexpertassistancebepursuedbeforeconsideringtransactingbusinessintheinternationalmarketplace.ItshouldbenotedthatitisnottheintentofSterlingNationalBankortheauthortoprovidelegalorprofessionalservices.Rather,itisourhopethatthisguidewillserveasausefultoolandinitialintroductiontoanextremelycomplexfield.Sterlingwelcomesyourinquiriesoninternationaltradeactivitiesandplacesatyourdisposaltheorganiza