Handling discrepant documents against LC

Nironjan Roy | Published: April 27, 2016 20:05:37 | Updated: October 24, 2017 12:04:28


While working in a commercial bank in Bangladesh, I met one senior colleague who was well conversant with letter of credit (LC) transaction, particularly negotiation of export documents. One day I asked him about discrepancy of documents against LC and in response, he said that there is no hard and fast rule, as even mere spelling mistake may cause discrepancy. Later on I learnt that simple misspelling cannot result in discrepancy in export/import documents.

Discrepancy in LC documents is very familiar among bankers who work in LC department. Import-export business is carried under documentary credit where bank absolutely deals with documents. Payment made by bank against LC is entirely based on the documents presented.

Documents against LC can hardly be prepared error-free in the practical world. At the same time, bankers always try to ensure payment against LC documents which are presented in accurate and correct order. However, perfect presentation is almost nonexistent and therefore, various rules and regulations have been developed in trade finance area of banking to determine discrepant documents and compliant presentation.

ERRONEOUS & DISCREPANT DOCUMENTS: Erroneous documents and discrepant documents are not same terminology in LC transaction because the former, which is very common in preparing any paper, does not necessarily bar the documents from being compliant for presentation while the latter, which contains some deviations/lapses, clearly bars the documents from being compliant for presentation.

As per Article 15 of UCPDC (Uniform Customs and Practice of Documentary Credit), compliant presentation always binds the issuing bank or confirming bank if LC is confirmed to make payment to the presenter of the documents. Of course, there is a subtle distinction between erroneous documents and discrepant documents, as all discrepant documents must contain error while all errors in the LC documents may not constitute discrepancy. Discrepancy arises only when presentation of LC documents is not made in accordance with the terms of LC, UCPDC and ISBP (International Standard Banking Practice).

Bankers working in LC department must have clear understanding about discrepant documents and compliant documents. Every dealing officer must have efficiency in scrutinising LC documents and identifying discrepancy therein so that compliant presentation can be ascertained.

In the case of import LC, terms and conditions are stipulated by the respective issuing bank in the importing country and major parts of LC contents come from terms and conditions agreed upon by the applicant and beneficiary i.e. importer and exporter. In addition, some other regular terms and condition as per UCPDC and ISBP are also included in the contents of the LC.

While issuing any import LC, the banker must be very careful in inserting conditions so that it does not conflict with UCPDC and ISBP. Similarly export LC issued by the importer's bank abroad may contain some terms and conditions which may not be compliable by the exporters and their bank as well. Therefore, it is the responsibility of the banker to thoroughly review the contents of export LC with a view to ascertaining any non-compliable clause in LC and if so, measure must be taken to amend it prior to undertaking transaction.   
DOCUMENTS EXAMINING TECHNIQUE: Documents against LC are examined on the basis of Article 14 of UCPDC where sub-articles 'a' to 'l' clearly state how the examination will be carried out and what issues will be considered as discrepancy.  Many bankers in our country raise some factors as discrepancy but these are not directly related to the documents presented and as such discrepancy cannot be established because sub-article 'a' clearly mentions that the bank must examine a presentation to determine on the basis of the documents alone. So as per this sub-article, there is no scope of looking at other documents or factors. Late shipment and presentation are very common discrepancies we come across but this discrepancy will be determined solely on the basis of sub-article 'c' where it has been clearly stated that presentation must be made not later than 21 calendar days after the shipment date but at any event not later than the expiry date of the credit. This situation must be very carefully examined specially when there is more than 21 days' window between the shipment date and the LC expiry date e.g. shipment date is May 01 and LC expiry date May 31.
Inconsistent information in different papers is another common discrepancy raised by the bankers but we have to keep in mind that sub-article 'd' has clearly stated that data presented need not to be identical but must not conflict with the credit. Description of goods is another complicated factor in examining LC documents and bankers must apply their knowledge of sub-article 'e' which specifically states that other than commercial invoice, description of goods should be in general term but must not conflict with the description provided in the LC.
Sometime confusion arises over additional papers/information attached with the presentation but as per sub-article 'g' any paper/document which is not required by the LC will be disregarded. If the names, addresses and telephone numbers used by applicant and beneficiary are found to be  different than those mentioned in the credit, specific direction under sub-article 'j' must be meticulously followed. In fact, the bankers responsible for examining LC documents must thoroughly read and understand all relevant articles of UCPDC including 12 sub-articles of Article 14 and ISBP. Because UCPDC only mentions the articles and sub-articles describing the relevant rules and procedure but ISBP provides more details with appropriate explanation. Therefore, these two set of documents will have to be simultaneously consulted while examining the presentation.  
BILL OF ENTRY: From my days in banking in Bangladesh, I witnessed many audit objections terming payment illegally made against discrepant documents alleging that Bill of Entry was not submitted by the importer. This kind of audit objection marking discrepant documents due to non-submission of bill of entry seems to be ridiculous and clearly indicates the lack of knowledge in international trade. There is no relation between discrepant document and Bill of Entry and the banker has no role to play with regard to collecting Bill of Entry. It may, however, be mentioned here that Bill of Entry is applicable only for those countries where foreign exchange is regulated and this document is not required in many countries which follow the system of free trade. Since our country has a regulated foreign trade, Bill of Entry against each import will have to be issued by the port authority as a proof of physical arrival of goods against corresponding outflow of foreign currency.

This is the sole responsibility of the importer who will collect this document from the port authority and submit it to the bank as proof; otherwise, the bank will only report to the concerned authority as per existing circular. If the banker fails to report non-submission of Bill of Entry within a given time, s/he can only be held responsible and otherwise not and this should be clearly understood and followed by audits and no question of discrepancy should arise due to lack of non-submission of Bill of Entry.

BANGLADESH BANK CIRCULAR & DISCREPANCY:  In addition to the Exchange Control Regulation, the Bangladesh Bank (BB) issues circulars from time to time for regulating the country's foreign trade and bankers sometime get confused with the BB circulars which they consider while examining LC documents and identifies discrepancy.

The BB circulars in no way constitute any discrepancy unless these are in line with UCPDC and ISBP. When I used to work in a bank in Bangladesh, there was common audit objection about missing  suppliers' credit report because the BB circular then required obtaining credit report for establishing LC for more than certain value. Likewise, there are many precautionary requirements imposed by the Bangladesh Bank from time to time which commercial banks must have to comply with.

However, failure to comply with these circulars may invite audit objection but will not result in any discrepancy in LC documents. If complying with the BB circulars is required at all, it has to be done prior to establishing import LC or undertaking transaction against export LC. A few days back, one banker in Toronto was complaining against one of our commercial banks which had been delaying payment on the plea of obtaining approval from the Bangladesh Bank which is not an acceptable excuse at all.

ACCEPTING DISCREPANT DOCUMENTS & CONSEQUENCES: In most cases, discrepancy in LC documents is resolved through acceptance provided by the importer and thereby agreeing to make payment. Article 16 of UCPDC also allows waiver of discrepancy and acceptance of documents and therefore this is a widely acceptable approach of resolving discrepancy. However, trade finance is now considered most vulnerable to money laundering and as a precautionary measure, hurriedly provided acceptance by the importer is viewed with serious attention.

Although this is not related to trade rules, yet additional responsibility in respect of KYC (Know Your Customer), DD (Due Diligence) and EDD (Enhanced Due Diligence) have been vested on the bankers. When acceptance is provided by the importer to the discrepant documents, the banker must ensure what kind of discrepancy is accepted and whether this may pose money laundering risk.

Examining LC documents is a very technical task for which specialised experience and extensive knowledge about UCPDC and ISBP are a must. Moreover, understanding of these two rules is very difficult because language of these rules is so complicated that ordinary bankers can hardly understand these.

Therefore, every bank must maintain a centralised team of specialised bankers who will prepare a brief procedure for examining checklist which will be provided to the officers responsible for scrutinising LC documents.

The complicated documents should be sent to this team for its appropriate advice prior to deciding on discrepancy. While introducing this practice, five days' deadline as per Article 14 (b) will have to be taken into consideration.

This central team should have access to DC-PRO of ICC so that they can remain conversant and up-to-date with the decisions taken from time to time by ICC on various discrepant documents and resultantly they will be able to adjudicate when confronted with similar situation.

The responsibility of scrutinising documents against LC, identifying discrepancy and ensuring compliant presentation is a very crucial function in trade finance (Import-export) department of a bank as this involves payment and receipt of foreign currency and the image of the institution and the country as well.

If the banker fails to properly identify the discrepancy, there is a possibility that importer/exporter, concerned bank and, above all, the country may lose foreign currency. Similarly, if unnecessary issues are raised as discrepancies for which payment is delayed, the bank's as well as the country's reputation will be at question.

The writer is a banker based in Toronto, Canada

nironjankumar_roy@yahoo.com
 

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