Credit professionals who use or may consider using commercial letters of credit (LCs) in their sales should mark July 1, 2007 on their calendars. That is when the new UCP600 (Uniform Customs & Practice for Documentary Credit) rules for LCs take effect, replacing the UCP500 which has been in effect since 1994. Buddy Baker, vice president, sr. sales rep., financial solutions for Atradius Trade Credit Insurance, presented a sold-out FCIB audio teleconference that explained the changes that will take place and the process for developing the guidelines that most parties adhere to when issuing and receiving payments from LCs.
Baker, an FCIB Board member and expert on LCs with 25 years of experience in international trade finance, outlined the history of rules that govern these financial instruments. He pointed out they do not have the force of law, but are widely accepted by the international banking community. They were first written in the 1920s for New York banks that primarily handled international financial transactions. In the 1930s, the International Chamber of Commerce (ICC) published the standards of procedures involving LCs. The UCP is drafted by the ICC’s Banking Commission and gets revised periodically, Baker said, about every 10 years or so. He noted changes are made to it when issues need to be addressed. Specifically, some confusion over UCP500 provisions has led to some of the changes reflected in UCP600. Some of these areas of confusion have even resulted in lawsuits. The ISBP or International Standard Banking Practice, issues opinions and interpretations of UCP standards. “Some of the interpretations of the ISBP have been incorporated into the UCP600,” Baker said.
“There were a lot of discrepancies in LCs under UCP500,” Baker said. He noted that according to a study conducted by Michigan State University, 4 out of 5 documents (invoices, bills of lading, etc.) do not comply with what’s stated in the LC. “It was mainly a case of people not being careful when they prepare their documents.” Most of these discrepancies do not derail payment of the LCs, though. “If there are discrepancies, the applicant must waive them or have them fixed,” Baker said. It is the banks that are responsible for refusing documents that they deem do not comply with the LCs.
Baker said of the many changes to UCP600 there were three major ones. One is that banks, which under UCP500 had a “reasonable time” to review documents and decide if there are any discrepancies “without delay”, now have five days to examine documents and assert any discrepancies. This change should eliminate any differences in opinion on what constitutes a reasonable time. The second major change is that addresses in documents and the invoice do not have to exactly match as long as business addresses are in the same country. Baker pointed out that because companies often have several addresses, there were often different addresses for the same company listed in different documents. Under UCP600, they don’t have to match as long as the addresses are in the same country. However, this relaxation of address requirements does not apply to transport documents. The third major change under UCP600 is that issuing banks are allowed to refuse documents and then release them upon obtaining a waiver of discrepancies.
Source: Tom Diana, NACM staff writer