A number of banks were consulted during the course of the research and figures regarding types of discrepancy and their frequency were complied by three of these banks. They were asked to examine discrepant documents and record the reason for rejection. Details of the results are given in Appendix 1. Below are listed the top ten discrepancies leading to rejection of letters of credit. Additionally the party with the responsibility for the error is given.
| Discrepancy | Reason | Responsibility |
|---|---|---|
| Inconsistent data | Different information between the different documents. | Exporter |
| Absence of documents | Documents required by the letter of credit are missing | Exporter |
| Other | Other documentation reasons not specifically noted | Exporter; any third party e.g. PSI company, carrier |
| Late presentation | Documents presented later than 21 days after shipment or after the number of days stipulated in the letter of credit | Exporter |
| Carrier not named and signing capacity | The name of the carrier on the airway bill is missing or not signed on behalf of the carrier | The transport provider |
| Incorrect data | Information on the set of documents is not in conformity with the letter of credit | Exporter |
| Letter of credit expired | Documents presented after the letter of credit has expired | Exporter |
| Incorrect goods description | The goods description on the documents differs from that on the letter of credit | Exporter |
| Incorrect or absence of endorsement | The bills of lading, insurance certificate or bill of exchange not endorsed by the exporter or other party | Exporter or insurance company |
| Late Shipment | Goods shipped after the last date given for shipment | Exporter/carrier |
It can be seen from this information that the responsibility for the majority of these top ten discrepancies is with the exporter - the party requiring security from the use of the letter of credit. Although there are times when events beyond an exporter's control may cause documents to be presented late or after the expiry of the letter of credit, with a planned strategy for dealing with letters of credit and well trained staff many discrepancies could be eliminated.
Ideas for a strategy for dealing with letters of credit are given in Section 5. In order for this to be effective support needs to be given to the strategy throughout the company, from clerks dealing with letters of credit through to Directors. If it is seen as necessary to use a letter of credit to provide a secure method of payment, then time must be given to ensure that an adequate strategy is in place, and is used, to ensure that letters of credit are dealt with in a professional and effective manner.
Training is also an important part of ensuring smooth and efficient letter of credit transactions, for both export company staff and also for bank staff. Within the export company training is essential both for the export clerk who will be dealing directly with the letter of credit and associated documentation, but also for sales executives who will need to ensure that the correct terms are agreed for the letter of credit when contract negotiation takes place. On the job training is important - each company has its own way of dealing with exports and letters of credit. However, this really should be backed up by formal training. This could take the form of a short course (over one or two days) or longer term training either at a college or by distance learning. A list of organisations providing training in letters of credit are given at Appendix 2. This is by no means exhaustive, but should give some pointers for those dealing in letters of credit who are either untrained or feel the need to brush up on their formal knowledge.
One very important issue that should be dealt with on training courses is UCP500. It is important that those dealing with letters of credit should not only have access to this publication (available from the ICC), but also a knowledge and understanding of all the articles within UCP500. It is also important for bank staff who check letters of credit to have a detailed knowledge of UCP500. When returning discrepant documents to an exporter as well as details of the discrepancies the bank should include reference to the article(s) of UCP500 with which the documents do not comply.
The Cost of Non-Compliance to UK Businesses
The information gathered in the survey showed that in many cases presentations of discrepant documents could easily be avoided. To show how important it is to eliminate discrepant documents in letter of credit trade an estimate has been made of the cost to UK businesses of non-compliant presentations.
The cost to exporters of discrepant documents under letters of credit is estimated at £113 million per year. This figure includes loss of interest due to delayed payment (using an average of 21 days delay getting paid and interest at 5%), charges imposed by the banks for discrepant documents and additional processing costs. Over and above this are other costs such as adverse cash flow and ultimately the loss of opportunity to trade. There is also the potential loss of business due to dissatisfied customers - where documents have been delayed, thereby delaying the clearance of goods on arrival.
- Contents
- Executive Summary
- Section 1 - Introduction
- Section 2 - Letters of Credit - An Explanation
- Section 3 - Global Payment Patterns
- Section 4 - The Survey - Return to top of page
- Section 5 - Demonstrated Best Practice
- Section 6 - Conclusions
- Glossary of Commonly Used Terms in Documentary Credits
- Appendix 1 - List of Discrepancies and Frequency
- Appendix 2 - Organisations Providing Letter of Credit Training
- Appendix 3 - Checklist for Compiling Documents Under a Letter of Credit
Return to Policy Development: Reports
