Green Clause Letter of Credit ( Green Clause L/C)

The easiest way to understand green clause L/C is to understand Red Clause L/C first, since the scheme
is quite similar, the difference lays is that Green Clause L/C requires more documentation than Red
Clause L/C.
Unlike the red clause letter of credit, in the case of a green clause letter of credit, the advance is
normally paid not only against receipt and a written undertaking from the seller to subsequently deliver
the transportation documents before the credit expires, but also against receipt of an additional
document providing proof that the goods to be shipped have been warehoused.
If the under the Red clause L/C, the advance payment can be made against the receipt of undertaking
from the seller that they will subsequently make the shipment and deliver the documents before the LC
expiry, Green Clause L/C requires more effort from the seller to shows that they are capable to produce
the goods ordered, that is why they need to prove that the goods already in the warehouse and waiting
for shipment. From this angle, we could say that green clause L/C provide slightly better security than
red clause L/C

Red Clause Letter of Credit ( Red Clause L/C )

What is red clause L/C? the simplest thing to say is that it is an advance payment L/C. Under Red
Clause L/C, the issuing bank will make the advance payment

to the exporter / seller before they

actually ship the goods to the importers. Issuing banks make the advance payment under a red clause
letter of credit against presentation of required documents under the Red Clause L/C, which in many
cases will involve the requirement of an advance payment guarantee issued by the bankers of the
exporter, guaranteeing a refund in the event of failure to ship under the credit.
The percentage (%) of advance payment it self willvaries among agreements between the buyers /
importers and the sellers / exporters, in many cases the advance payment is made for downpayment
purpose ( for example : 30% of the contract amount), and in some cases the buyer is willing to give
100% advance payment, usually this case happened if the seller power is bigger than the buyer.
The benefir for the seller of having Red Clause L/C is because they could get the payment in advance /
portion of payment in advance, which the money can be used to fullfil they working capital requirement
in order to produce the goods requested by the buyer.
For better understanding, lets see below example:
A buyer agree to provide a 30% advance payment to the seller upon presentation of advance payment
guarantee from the seller, while the remaining 70% payment will be made after the delivery of the
goods.

1. Sales contract between buyer & seller. Buyer agree to provide 30% advance payment upon a
presentation of advance payment guarantee from the seller (in other case, the buyer will probably
requires pro-forma invoice only for the advance payment).
2. Buyer request the issuing bank to issue Red Clause L/C
3. Issuing Bank Issue Red Clause L/C
4. Advising bank advise Red Clause L/C to seller (beneficiary)
5. Seller submit the advance payment document, which is advance payment guarantee to the issuing
bank through their negotiating bank.
6. Negotiating bank forward the advance payment guarantee to the issuing bank
7. Issuing Bank check the advance payment guarantee and inform the applicant that the doc has arrived
8. Buyer / Applicant will provide their undertaking to issuing bank that they will pay the 30% advance
payment to the issuing bank.

9. Issuing bank will make the 30% advance payment to the seller through the nominated bank
10. Nominated bank receive the payment and advise the seller.
11. Upon receiving the advance payment, the seller will use the money to produce the goods requested
by the buyer. Once it is completed, then the seller ship the goods using the shipping company & receive
a B/L in return
12. Seller present the required documents (including but not limited to B/L) under the L/C to nominated
bank
13. Upon checking, Nominated bank will forward the presented docs to the issuing bank
14a. Issuing bank will check the docs and inform the buyer (applicant) on the arrival of the docs.
14b. Applicant make the payment to the issuing bank (100%) + plus interest for the 30% advance
payment that has been paid by issuing bank earlier
15.Issuing bank will remit the remaining unpaid portion (70%) to the seller through nominated bank
16. Nominated bank advise the payment to the seller (beneficiary)
17 & 18. Using the B/L, the buyer clear the goods from the shipping line.
Trivia : Why the LC is named Red Clause L/C?
Answer : It is because long time ago, the L/C was written using red ink.
Below is the example of red clause that i got from letterofcredit.biz
Red Clause Letter of Credit Sample in Swift Format
Instance Type and Transmission Original received from SWIFT
Priority/Delivery : Normal
Message Output Reference
: 1225 121016XXXXXXXXX5657939061
Correspondent Input Reference : 1225 121016XXXXXXXXX1178375172
Message Header
Swift OUTPUT FIN 700 Issue of a Documentary Credit
Sender : ASIATRISXXX
Receiver : PCBCCNBJXXX
Message Text 27: Sequence of Total
1/1
40A: Form of Documentary Credit
IRREVOCABLE
20: Documentary Credit Number
ASIAIM00004050
31C: Date of Issue
130722
40E: Applicable Rules
UCP LATEST VERSION
31D: Date and Place of Expiry
131230-TURKEY
50: Applicant
ASIA BANK OF TURKEY TAS
BUYUK HAN MAH. ISMAIL HAKKI BEY
CAD. NO:20 34500
SISLI,ISTANBUL/TURKEY
59: Beneficiary Name & Address
NINGBO PLASTIC MACHINERY CO., LTD.
PLS SEE FIELD 47A ITEM 7 FOR ADDRESS DETAILS
32B: Currency Code, Amount
Currency : USD (US DOLLAR)
Amount : #327.000,00#
39B: Maximum Credit Amount
NOT EXCEEDING
41A: Available WithBy BIC
ASIATRISXXX
ASIA BANK OF TURKEY TAS BUYUK HAN MAH. ISMAIL HAKKI BEY CAD. NO:20 34500
SISLI,ISTANBUL/TURKEY
BY MIXED PYMT
43P: Partial Shipments
NOT ALLOWED

43T: Transhipment
ALLOWED
44E: Port of Loading/Airport of Departure
ANY CHINESE PORT
44F: Port of Discharge/Airport of Destination
HAYDARPASA PORT ISTANBUL
44C: Latest Date of Shipment
131209
45A: Description of Goods &/or Services
NEW PLASTIC CUP MAKING LINE QTY:1 SET U/P:USD 327.000 FOR TOTAL AMOUNT:USD 327.000,00 AS
PER BENEFICIARYS PROFORMA INVOICE REF NO:NB130522 DD:04.07.2013
INCOTERMS 2010:CIF HAYDARPASA ISTANBUL TURKEY
46A: Documents Required
1 DULY SIGNED COMMERCIAL INVOICE IN 2 ORIGINALS AND 3 COPIES CERTIFYING IN STRICT
CONFORMITY WITH THE BENEFICIARYS PROFORMA INVOICE REF NO:LL130522 DD:04.07.2013 AND
SHOWING QUANTITY, DESCRIPTION ,ALSO STATING FOB VALUE OF THE GOODS FREIGHT AND
INSURANCE SEPERATELY.
1 CLEAN ON BOARD B/L IN 3/3 ORGS.AND 3 N/N COPIES ISSUED TO THE ORDER OF ISSUING BANK
NOTIFY APPLICANT,MARKED:FREIGHT PREPAID.
1 PACKING LIST IN 2 ORG.S AND 2 COPIES.
1 BENEFICIARYS CERTIFICATE 1 ORG. STATING THAT SHIPMENT DETAILS INCLUDING DATE AND PLACE
OF LOADING,NAME AGE,NATIONALITY,IMO NUMBER OF THE VESSEL,VALUE OF THE GOODS, GROSS
AND NET WEIGHTS OF THE GOODS AND THE REF.NO OF THE L/C HAVE BEEN SENT TO OUR BANKS FAX
NO:+90 212 600 50 10 WITHIN 2 DAYS AFTER SHIPMENT DATE FOR INFORMATION PURPOSES.(FAX
REPORT AND SHIPMENT DETAILS HAVE BEEN ATTACHED TO THIS DOC.)
1 CERTIFICATE BY BENEFICIARY STATING THAT CEMARK HAS BEEN LABELLED ON PACKAGES OF THE
GOODS AND TECHNICAL DOCUMENTS IN STRICT CONFORMITY CONCERNING LEGISLATION
1 FULL SET INSURANCE POLICY ISSUED TO THE ORDER OF ISSUING BANK FOR FULL CIF VALUE PLUS 10
PERCENT AND STATING THE NAME, PHONE AND FAX NUMBERS OF A CLAIMS SETTLING AGENT IN
TURKIYE AND CLAIMS PAYABLE IN TURKIYE COVERING THE
FOLLOWING RISKS FROM WAREHOUSE TO WAREHOUSE:
+INSTITUTE CARGO CLAUSES (A)
+INSTITUTE WAR CLAUSES (CARGO)
+INSTITUTE STRIKE CLAUSES (CARGO)
+RIOTS AND CIVIL COMMOTIONS,
ALSO INSURANCE TO CERTIFY THAT COVER IS NOT SUBJECT TO A FRANCHISE OR AN EXCESS
(DEDUCTIBLE).
1 CERTIFICATE OF ORIGIN IN 1 ORG. AND 1 COPY LEGALIZED BY THE LOCAL CHAMBER OF COMMERCE
ATTESTING THAT GOODS ARE CHINA ORIGIN.
47A: Additional Conditions
1 ALL DOCUMENTS MUST BEAR OUR L/C REF.
1 IN CASE OF PRESENTATION OF THE DOCUMENTS WITH DISCREPANCIES, USD 100,00 WILL BE
DEDUCTED FROM THE PROCEEDS AS AN ADDITIONAL PROCESS FEE.
1 DOCUMENTS ISSUED BEFORE L/C OPENING DATE NOT ACCEPTABLE.
1 PAYMENTS TO BENEFICIARY UNDER RESERVE AND ANY KIND OF GUARANTEE ARE NOT ACCEPTABLE
1 ALL DOCS MUST BE ISSUED OR FILLED IN ENGLISH
1 BENEFICIARYS ADDRESS:DEVELOPED AREA OF NINGBO ECONOMIC DEVELOPMENT ZONE NINGBO
CITY CHINA
71B: Charges
ALL BANKING CHARGES AND COMMISSIONS OUTSIDE OF TURKEY ARE FOR BENEFICIARYS ACCOUNT.
48: Period for Presentation
21 DAYS AFTER SHIPMENT DATE BUT WITHIN CREDIT VALIDITY.
49: Confirmation Instructions
WITHOUT
78: Instruction to Paying/Accepting/Negotiating Bank
+30 PCT OF L/C AMOUNT SHALL BE PAID IN ADVANCE UPON RECEIVING ADVANCE PAYMENT GUARANTEE, 70
PCT OF L/C AMOUNT SHALL BE PAID UPON RECEIPT OF CREDIT CONFORM DOCS.
+PLS ADVISE US THE REMITTANCE OF THE DOCS. BY MT754 MSG. QUOTING OUR REF.

72: Sender To Receiver Information

+PLS SEND THE DOCS TO FOLLOWING ADDRESS BY DHL IN ONE LOT: ASIA BANK OF TURKEY TAS BUYUK
HAN MAH. ISMAIL HAKKI BEY CAD. NO:20 34500 SISLI,ISTANBUL/TURKEY
Message Trailer
{MAC:00000000}
{CHK:XXXXXXXX}

Back to Back Letter of Credit ( Back to Back L/C )

Back-to-back L/C serve almost simliar purpose as transferable L/C, which is to accomodate intermediary
trade transaction. Whereby the middle man / trading house issue a L/C (Back to back L/C) to their final
supplier, using the LC that their received from the final buyer (master L/C) as the security to the issuing
banks.
If it serve the same purpose as transferable L/C, then what is the difference? The main difference is with
whom will be the final payment obligation (Please kindly refer to this link for better understanding
about Tranferable L/C)
In transferable L/C, the ultimate payment obligation lays on the issuing bank who issue transferable L/C.
A transfering bank is merely transfering the LC to the final seller without adding their payment
undertaking. In that sense, transferring bank is not obliged to pay the final seller, regardless the issuing
bank make the payment or not. While Back to back L/C is basically 2 separate irrevocable L/Cs :
(1) Buyer issues the first L/C (master L/C) to the middle man / trading house
(2) Middle man / trading house issue the 2nd LC (back to back L/C) to the final supplier, using the
master L/C as the security to their issuing bank.

In simple way, we could say that most likely the middle man / trader they dont have any L/C to support
their purhase from the final supplier, however they managed to get prospect buyer that are willing to
issue a L/C to them. So in order for them to get L/C facility, the middle man / trading house need to
request their bank to issue a L/C to the final supplier using the L/C (master L/C) that they received
from the final buyer, that is why the L/C is called back to back, meaning the second L/C is backed by the
first L/C. The 2nd issuing bank will need to make sure that the clause in the back to back L/C will mirror
the clauses in the master L/C, because the 2nd issuing bank will only secure the payment should the
first issuing bank honor the master L/C. As mentioned earlier, PLEASE TAKE INTO ATTENTION THAT
UNLIKE TRANSFERABLE L/C, BACK TO BACK L/C TRANSACTION CONSISTS OF 2 SEPARATE
INDEPENDENT L/Cs, meaning the 2nd bank that issue the 2nd L/C (back to back L/C) will be exposed to
substantial payment risk. For this reason, Back to back L/C is rarely used international trade finance.
Still confuse? lets try by a real case
Yourn customer, company (A) based in Indonesia, would like to purchase a specific chemical from a
your trading company (company B) in Singapore. Company A are aware that that specific chemical is
usually produced in Brazil, but they dont have direct access to the main producer (company C), thus
they will need to rely on your company service as the middle man who has a direct access the main
manufacture (company C).
Since your company (company B) is a relatively small company, they dont have any available L/C facility
with any banks, while the main manufacturer (company C) requires L/C for any sales. Your buyer
(company A) agrees to issue a L/C to your company for the procurement, however unfortunately
company A refuse to issue a transferable L/C, thus the available solution is to use back to back L/C.

Your company (company B) will require your customer (company A) to issue a irrevocable L/C , and
once you receive the L/C at your bank (Bank B), you could negotiate with your bank to provide you a
back to back L/C facility, using the LC you received from company A as the collateral. Your bank will do a
credit & transaction analysis on your company and then decided to accomodate your request. Upon
receiving the LC from company A (master L/C), Bank B will then will issue a new irrevocable L/C (back
to back L/C) as per your request, whereby the terms and condition of the 2nd L/C (back to back L/C)
will mirror the terms and condition of the 1st L/C (master L/C), except for :
Amount
Unit price of the merchandise (if stated)
Expiry date
Presentation period
Latest shipment date or given period for shipment.
Pricing Arrangment :
Sales price from company C to Company B : USD 800
Sales price from company B to Company A : USD 1000

Transaction Flows :
1a. Purchase contract between buyer / applicant 1 (company A) & company B (1st beneficiary / middle
man) at USD 1000
1b. Company B (1st beneficiary) make purchase contract / purchase order with Company C (2nd
beneficiary), as the ultimate seller at USD 800
2. Company A / Applicant 1 (Ultimate Buyer) request the issuing bank 1 (bank A) to issue a normal LC
(master L/C) to company B / Beneficiary 1 (middle man).
3. Issuing Bank 1 (Bank A) issue the LC on behalf of company A (applicant 1) to Company B /
beneficiary 1 (middle man), LC amount is USD 1000.
4. Bank B (Advising bank 1) advices the LC to company B / beneficiary B (USD 1000)
5. Company B (Applicant 2) submit an application to open a back to back LC to their bank (Bank B /
Issuing Bank 2), LC amount is reduced to USD 800, other than that they also curtailed the unit price,
expiry date, presentation period and latest shipment date. Other terms and condition such as packing
list, certificate of origin, etc, need to mirror the master L/C (original L/C)

6. Issuing Bank 2 (Bank B) issue a back to back L/C with a new amount of USD 800 & conditions to the
Ultimate seller / Beneficiary 2 (company C) through the 2nd Advising Bank. Advising bank 2 will advices
the transferred L/C to the Ultimate seller / Beneficiary 2 (company C)
7a. Company C / Beneficiary 2 ship the goods directly to agreed port at company A / Applicant 1s
country. Goods value is USD 800, as agreed with company B / Beneficiary 1 (middle man)
7b. Company C / Beneficiary 2 prepare the documents that are requested under the L/C and present the
documents to their bank (Bank C / Negotiating Bank 2) for checking.
8. Upon checking, the Bank C / Negotiating bank 2 will forward the documents to the 2nd Issuing Bank
(Bank B).
9. Upon receiving the documents, the Bank B (Issuing Bank 2) will inform the 1st beneficiary (company
B) about the documents. Company B will replace several documents , especially invoice, to reflect the
original amount of USD 1000, and ask bank B to forward the adjusted documents to the Bank A (1st
issuing bank).
10. Bank B (Issuing Bank 2) send the documents to Bank A (Issuing bank 1) for checking.
11a. Upon checking the presented documents, Bank A (Issuing Bank 1) will make the payment to Bank
B (Negotiating Bank 1). Payment amont is USD 1000
11b. Upon payment undertaking from Applicant 1 (Ultimate Buyer), Bank A (Issuing Bank 1) will release
documents to Applicant 1 (Ultimate Buyer).
12a. Upon receiving the payment from Bank A (1st Issuing Bank), Bank B (Negotiating Bank 1) will
remit the USD 800 payment to Bank C (Negotiating Bank 2),
12b. The surplus fund of USD 200 (USD 1000 USD 800) is remitted back to Company B (Applicant 2),
this serves as a profit for Company B.
13. Bank C (Negotiating Bank C) will remit the payment to Company Cs (Beneficiary 2) account.
Potential Risks
For middle man :
- The identity of the ultimate buyer and seller would probably be disclosed from the documentation
submitted by the ultimate seller
- Since back to back LC consist of 2 independent L/Cs, thus the middle man is obliged to pay the
ultimate seller (company C), regardless whether the 1st issuing bank (Bank A) honor the payment of the
master L/C or not. Incase Bank A goes bankrupt, as long as Company C submit all documents as
required by the bank to bank L/C, then Company B / Bank B is obliged to pay (independent irrevocable
undertaking)
For Issuing Bank 2 (Bank B)
Since back to back LC is independent from master L/C, thus the Issuing Bank B is exposed to the
payment risk / operational risk of Bank A. Should Bank B has made the payment to ultimate seller, and
then Issuing Bank 1 reject to pay the master L/C, then issuing Bank B will not be able to recover the
fund. Of course Issuing Bank 2 will have the recourse right to Company B, but usually a company that
use back to back L/C usually doesnt have much assets / the financial capability is not that strong, thus
Bank B is still exposed to the default risk of Company B.
Benefit
For Ulimate Seller :
Ultimate seller (Company C) doesnt need to worry about the payment risk of Issuing Bank 1 (Bank A),
as long as the present all required documents to Bank B, then they will get the payment from Bank B.
This is difference from transferable L/C, whereby Company C is exposed to the payment risk of Issuing
Bank 1 (Bank A).
For Middle Man :

With back to back L/C scheme, it will be easier for the middle man to get the LC facility from their bank,
since the bank sees this transaction as more secured transaction if compared to normal L/C transaction.
Demerit
For Middle Man :
Different with transferable L/C, which not require any banking facility (its just merely a transferring
service). In back to back L/C transaction, Middle man will need to have Back to back L/C facility,
meaning the Bank will need to do analysis on the financial condition of the middle man, and there will be
more documentation & agreement to deal with. Other than that, in some cases, the bank will still
require additional security to provide the back to back L/C facility.