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The importance of critical verification of documents under a letter of credit

While negotiating documents under a letter of credit, the bank will adhere to the principle of strict compliance. That is, the documents presented should agree with the stipulations of the credit in tow. Non-compliance with the terms of credit, however minor such discrepancy may be, would provide a ground for the issuing bank and the importer to reject the documents and refuse payment under the credit.

When approached to negotiate documents under a credit, the bank should verify the credit itself and see that it is valid (i.e., it has not expired); that it attaches no onerous clauses on the negotiating bank and that the payment is not made conditional. It should verify individual documents tendered and satisfy that they are in agreement with the terms of the credit. Further it should scrutinize the documents inter se (that is, one with the order, like bill of lading with invoice) to see that there are no discrepancies. The common discrepancies that may be found in the documents tendered under a letter of credit are listed below.

A. Bill of exchange

1. The bill is drawn on the importer instead of on the issuing bank as required in the credit.

2. Reference to the letter of credit is missing.

3. Tenor of the bill is different from that required under the credit.

4. The name of the party is mis-spelt.

B. Invoice

1. The invoice is not addressed to the importer.

2. The amount exceeds the limit under letter of credit or the unit price exceeds that mentioned in the credit.

3. The details of the cost, insurance and freight and other charges are not shown separately where it is required under the credit.

4. The description of the goods does not agree with the description in the credit

5. The number of packages/quantity differs from the credit requirements. The difference may be with respect to the quantity or number of packages mentioned in the bill of lading also.

6. Invoice is not signed by the exporter.

7. It does not certify the origin of goods, where a certified invoice is required.

8. Reference to the import licence number as required by the credit is missing.

9. The marking, etc., differ from that appearing on the bill of lading.

10. Charges not permitted by the terms of contract arc included.

11. The number of copies is less than the number required.

C. Bill of lading

1. The full set of negotiable copies of bill of lading is not submitted. The bill of lading would mention the number of copies issued. All copies are to submit ted.

2. Bill of lading is claused.

3. The number of packing/weight differs from that in invoice.

4. Bill of lading is issued by forwarding agents.

5. Bill of lading does not indicate that goods have been received on board the ship.

6. Where the credit is on CFR of CIF basis, freight payable bill of lading is submitted instead of freight paid bill of lading.

7. Bill of lading is drawn with the importer as consignee instead of the exporter.

8. It is not endorsed in blank or in the name of the bank as required.

9. The bill of lading is dated subsequent to the latest date or shipment.

10. Bill of lading is presented after undue delay. That is, it is presented after the time allowed in the credit or, where there is no provision in the credit, it is presented after 21 days from the date of issue.

D. Insurance Documents

1. The amount covered is low. Generally a letter of credit would require insurance for CIF value plus ten per cent.

2. Insurance is expressed in a currency other than the one in which the credit is drawn.

3. Risk covered does not agree with the requirements of the credit.

4. Insurance does not cover the entire voyage.

5. Description of goods and shipping marks do not agree with the invoice.

6. The name of the vessel indicated differs from that in the bill of lading.

7. Insurance policy is not endorsed in blank.

8. Insurance certificate is not countersigned by the shipper.

9. Insurance policy is dated later than the date of the bill of lading.

10. The place of settlement of claims differs from that in the letter of credit.

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