FOREIGN TRADE UNIVERSITY

ENGLISH FOR SPECIFIC PURPOSES

ADVANTAGES, DISADVANTAGES AND THE RISKS OF

PAYMENTS MADE BY DOCUMENTARY LETTER OF CREDIT

Group 18
Ta Thu Trang : 1411110655
Nguyen Trang Linh : 1411110374
Duong Thuy Linh : 1411110398
Ngo Thi Cam Tu : 1411110672
Nguyen Thi Dung : 1411110117

Instructor: Mrs. Phan Kim Thoa

Hanoi, March 2017.

Contents
Abstract................................................................................................................... 3
1
Introduction.............................................................................................................4
Background.............................................................................................................5
I. Procedure involved in a letter of credit cycle.........................................................7
1. Parties to a letter of credit.................................................................................7
2. Procedure involves in a letter of credit.............................................................7
II. Advantages and disadvantages of payments made by Letter of Credit................10
1. To the Importer:..............................................................................................10
2. To the exporter:..............................................................................................11
III. Risks analysis....................................................................................................14
1. Exporters risks...............................................................................................14
2. Importers risks..............................................................................................18
Conclustions and future study.................................................................................23
References............................................................................................................... 24

Abstract

2
International trade is no longer only for the big corporate giants. As the global
economy continues to evolve, an increasing number of small, family run businesses
are beginning to do business in the international market place. One of the most
crucial details of trading, particularly in the international area, is effecting payment.
Letters of credit have been the preferred method of payment in international trade
transactions for centuries-since their inception in 1645. It is likely that they will
continue to be needed for the foreseeable future. The purpose of this research is to
provide information regarding the pros and cons as well as the risk when it comes
to using letters of credit.

3
 Introduction
As the payment instrument, letter of credit has become widely used in international
trade. Letter of credit is even described as the life-blood of international commerce.
Letter of credit takes care of the interests of both the exporter and importer, so it is
considered to be the most effective and safest method to secure the payment in
international trade transaction. However, each letters of credit party still bears some
amount of risk in the real practice. The problem will be discussed under three chapters:
Procedure involved in a letter of credit cycle; the advantages and disadvantages of
using letter of credit to the exporter and to the importer and risks analysis. Chapter 1
will focus on providing some basic knowledge about the commonly used international
payment method- letter of credit. Chapter 1 also gives a detailed description of steps
involved in using a letter of credit. Chapter 2 discusses the advantages and
disadvantages of payment made by documentary letter of credit. A letter of credit
enjoys various advantages by being highly customizable and reducing credit risks but
also brings some disadvantages with additional cost to international trade transactions.
Chapter 3 focuses on analyzing the risks. The main parties, which involve in the
process of letters of credit, are exporter, importer, and banks. The same as any payment
pattern, all of these parties bear different risks. These risks are going to be analyzed
based on the two principles of credit. The research paper will also give some real cases
to dive deeper into the risks analysis.

4
 Background
The readers who know this background can skip this section.
1. Letter of Credit A documentary letter from a bank that allows people to
(L/C) get a particular amount of money from another bank.
2. Importer A person, company, etc. that buys goods from another
country in order to sell them in their own country.
3. Exporter A person, company or country that sells goods to another
country.
4. Issueing Bank The bank which prepares the credit in accordance with the
applicants instructions and issues it addressed to the
beneficiary.
5. Advising Bank The bank selected by the issuing bank to authenticate the
credit and advice it to the beneficiary.
6. Applicant The importer (buyer) who submits an application for the
opening of a credit and who stipulates its term and
documentary requirements.
7. Beneficiary The exporter (seller) to whom the credit is addressed and
to whom the issuing bank gives its irrevocable
undertaking.
8. Flexible clauses The clauses that can control the beneficiary, and can be
revocable in any time. They can damage the benefit of
exporter a lot and exporter should try to avoid these
clauses.
9. Free on Board One of the incoterms of international trade. FOB is free
(FOB) on board (named port of shipment).free on board
means that the exporter fulfills his obligation to deliver
when the goods have passed over the ships rail ant the
named port of shipment. This means that the importer has
to bear all costs and risks of loss of or damage to the
goods from that point. The FOB term requires the seller to
clear the goods for export. This term can only be used for
sea or inland waterway transport.
10. Cost & Freight Also one of the incoterms of international trade. CFR is
(CFR) cost and freight (named port of destination).cost and
freight means that the exporter must pay the costs and
freight necessary to bring the goods to the named port of
destination but the risk of loss of damage to the goods, as
well as any additional costs due to events occurring after

5
 the time the goods have been delivered on board the
vessel, is transferred from the exporter to the importer
when the goods pass the ships rail in the port of shipment.
The CFR term requires the seller to clear the goods for
export. This term can only be used for sea and inland
waterway transport.
11. All risks term The term stands for a relatively broad form of insurance. It
covers property damage and, depending on the wording,
the business interruption loss caused by property damage,
irrespective of its cause. The scope of cover is defined by
the exclusions, these being indispensable in order to
guarantee the risks insurability. Thrsten Steinmann,
exposure (property & engineering), issue NO.8,
February, 2002. Those risks related to two (or more)
belligerents engaging in hostilities, whether or not there
has been a formal declaration of war. Such risks are
excluded by the F.C. & S.(free of capture and seizure)
warranty, but may be covered by a separate war risk
policy, at an additional premium.
12. A bill of lading A document which is issued by the transportation carrier
(BL) to the shipper acknowledging that they have received the
shipment of goods and that they have been placed on
board a particular vessel which is bound for a particular
destination and states the terms in which these goods
received are to be carried.

6
I. Procedure involved in a letter of credit cycle.
A letters of credit is a financial instrument issued by a bank or other intermediary
which guarantees payment to a third party, the bank is referred to as the issuer. The
banks customer is referred to as the account party and the thirds party is the
beneficiary. In effect, the letters of credit substitutes the banks credit for its
customers credit so that the risk to the seller is virtually eliminated. The seller draws
either sight or time drafts against the letter upon presenting the bank with appropriate
documents indicating compliance with the letters stipulated requirements. The bank is
repaid the purchase price plus interest and fees when the buyer pays or takes out a loan
which is often secured by the goods being purchased.
From a legal standpoint, a letter of credit has legal life that is entirely independent of
the transaction between the account party and the beneficiary it supports. According to
this independence principle, the banks obligation to pay under the credit is
conditioned only upon the presentation of the proper documents and not upon whether
the account party is satisfied with the transaction. Actually, there are three separate
contracts involved with each transaction. First, there is the contract between the
account party and the beneficiary. Secondly, there is a contract between the account
party and the bank. Finally, a contract exits between the bank and the beneficiary.

1. Parties to a letter of credit

Applicant
Issuing bank
Advising bank
Beneficiary
7
2. Procedure involves in a letter of credit
1. After signing the contract, it is up to the buyer to take the first step by
applying to their bank ( the bank referred to as the issuing bank in terms of
payment) to issue the agreed L/C.

2. The issuing bank must progress a formal credit approval of the application
and check that local permissions, import licences or currency approvals, if
needed, have been granted. When all formalities and procedures have been
dealt with, the L/C is issued as stipulated in the terms of payment, and
forwarded to the selected advising bank.
3. Upon arrival of the L/C from the issuing bank- by letter, fax or mostly
nowadays as a SWIFT message- the advising bank will assess its contents
and determine where it should be made payable. If the advising bank is
instructed to add its confirmation, this involves a separate credit decision in
this bank, after which the seller is notified of the L/C and its details,
including information about where it is to be honoured for payment
acceptance or deferred payment, and whether it has been confirmed by the
advising bank.
At this point, it is vital that the seller checks the terms of the L/C against the
agreed terms of payment to make sure that all the details and instructions
can be met a later stage when the documents are to be produced and
delivered. If not, the seller must immediately communicate directly with the
buyer so that the necessary amendments are made and confirmed to the
seller through the banks. Only then does the seller have the security on
which the whole transaction is based.
4. After shipment, the seller receives the transport documents and prepares the
other documents required. Checks are also made to ensure that they conform
to the terms of the L/C, but equally important, that the contents of the
documents presented are consistent between themselves.
The documents are then forwarded to the advising bank, which checks their
conformity with the terms of the L/C. The seller is contacted about any
discrepancies. Discrepancies that cannot be corrected at this late stage, for
example wrong shipping details or late presentation, will be subject to later

8
 approval by the buyer, and any payment made by the advising bank will
then be with recourse, subject to this approval.
5. The issuing bank will also check the documents and the buyer has to
consider any discrepancies. When approved, or if the documents are
compliant, the buyer has to pay. If not approved, the documents will be held
at the disposal of the advising bank, pending any new negotiation between
the buyer and the seller of the terms for such an approval, or ultimately
returned to the advising bank and the seller against repayment of any earlier
payment made with recourse to the seller

6. The documents are released to the buyer against payment at sight or at any
date as stipulated in the L/C
Applicant Contract
Beneficiary

Application
Payment

4
Documents

Documents 1
Payments
Advising

3 6

Payment

Documents
Advising bank Issuing bank

Issue
2
9
II. Advantages and disadvantages of payments made by Documentary Letter
of Credit.
A letter of credit enjoys various advantages by being highly customizable and reducing
credit risks but also brings some disadvantages with additional cost to international
trade transactions.

1. To the Importer:
a. Advantages:
Time-saving: The buyer can control the time period for shipping of the goods.
He can also minimize time, as bank acts on behalf of him. The terms of a letter
of credit can specify that fax presentments are allowed and that the draw must
be honored (or notice of dishonor given) within a few days or less. Unlike other
shipments, a shipment under Letter of credit is treated with most care to meet
delivery schedule and other required parameters by the exporter. The documents
receive by buyer promptly and quickly with complete sets. Unless meeting
delivery schedule and prompt documentation, the supplier does not get his
payment from opening bank. This is one of the major advantages of LC for an
importer is concerned.

Security: Normally, the supplier prefers LC than other transactions as this

method reduces the risk to the importer, due to various reasons. The first point
to mention is that while accepting a LC, the supplier guarantees to meet the
terms and conditions of letter of credit with documentary proof. This assurance
provides security to buyer for future business plan. Since buyer is the holder of
Letter of credit, bank acts on behalf of buyer. Opening bank remits amount only
after satisfaction of all terms and conditions of letter of credit with documentary
proof. This arrangement protects importer from losing money. This is an
advantage for the buyer on fulfillment of meeting commitments on shipments.

Efficiency: An importer/buyer is concerned; he can plan his payment schedule

properly by anticipating the requirements under letter of credit. This
arrangement makes importer for easier planning. Based on timely delivery
schedule, buyer receives goods on time thereby he can execute his business

10
 plan smoothly and efficiently, in turn satisfying his clients promptly and
effectively.

b. Disadvantages:
Strict compliance: One of the major disadvantages of letter of credit is that LC
is operated on the basis of documentation and not on the basis of physical
verification of goods on its quality, quantity or other parameters. In other words,
an LC issuing bank can effect payment to beneficiary of LC on the basis of
documentation produced as per the terms and conditions of letter of credit. The
parties under letter of credit do not have any right to physically verify the
contents of goods. So, if the buyer needs to confirm and satisfy on the quality of
goods he buys, he can appoint an inspection agency of international repute and
instruct exporter to enclose certificate of such inspection by mentioning a
condition in letter of credit.
Once opened a confirmed and irrevocable letter of credit, the importer/buyer
already tied up with the said business credit line and will not be able to change
in between. Due to various reasons, especially on selling price variation, if
buyer needs to stop his export order he is unable to do so.
Cost: Compared to other payment mode of transactions, cost of operating letter
of credit procedures and formalities are more expensive. Eventually, there may
be additional expenses to an importer especially on amendment, negotiation etc.

2. To the exporter:
a. Advatages
Security: The major advantage of Letter of credit to a supplier is minimizing of
credit risk. In an import and export trade, the geographical distance between
importer and exporter is very far; hence ascertaining credit worthiness of buyer
is a major threat. In a mode of Letter of credit, such risk can be avoided.
Buyer is unable to deny payment by raising dispute on quality of goods, as
letter of credit terms and conditions are based on documentation. This is a
major advantage of Letter of Credit in terms of seller point of view. Some of the
fraudulent buyers deliberately delays or hold payments by complaining on
quality of goods. In a letter of credit terms of business transactions, rejection of
export payment by raising complaint on quality of goods will not be effected.

11
 Another thing that makes letter of credit add security to the exporter is
demonstrated when disagreement occurs. In the case of dispute between the
trading partners, the exporter can withdraw the fund as agreed upon in the letter
of credit and resolves the disputes later in the court. The beneficiarys right to
the full amount is described in the phrase pay now, litigate later by the courts

Efficiency: LC provides a security to exporter which is another advantage of a

letter of credit. Based on such security, the exporter can preplan his further
business activities to strengthen his business world.

Assurance to receive money in full and on time is another advantage of letter of

credit. In a letter of credit, an exporter can ensure that he receives full amount
as per LC which helps seller to plan future business ideas. As you know,
finance at right time is a prime factor for any business transaction. So if a
business man receives his anticipated amount on time, he can plan his business
activities smoothly without wasting time.

Meeting delivery schedule by proper production plan is one of the major

advantages under a letter of credit terms of business. Normally, under a non LC
business terms, the buyer may keeps on changing delivery schedule as per their
requirements time to time. So this change of delivery schedule at importers
interest leads exporter to rearrange his overall daily business activities.

Moreover, in a letter of credit, any dispute in transaction can be settled easily, as

LC terms and conditions are under the guidelines of uniform customs and
practice of documentary credit. This is another advantageous to an exporter.

Normally and widely, a confirmed irrevocable LC is opened by buyer and seller

which is suitable for both. A confirmed irrevocable letter of credit is a
confirmed order for any exporter is concerned. So the exporter does not need
to worry on cancellation of his export order or changes in said order. This helps
a lot for an exporter for his business plans in various levels including financial
plans, minimizing production risk, saving time etc.

12
 Time-saving: In a letter of credit, all required documents have been mentioned
well in advance of shipment and there is no confusion or misunderstanding to
the importer (buyer) to inform supplier to act in between. This is a good
advantage for a supplier to preplan efficiently which saves time.

b. Disadvantages:
Cost: The most obvious disadvantages of letter of credit are large expenses.
Under letter of credit opening procedures, there are certain bank charges and
other costs. If buyer insists seller to pay such costs, the said charges will be
additional expenses for the supplier. Moreover, if exporter is aware that the
credit worthiness of buyer is favorable and sound, he does not need to open a
letter of credit to transact with such buyers. However, he agrees on opening LC
based on the requirements of buyer to enjoy the advantage of opening LC by
buyer. In such cases, meeting of all terms and conditions under letter of credit is
the major responsibility of exporter. Apart from meeting additional
documentation procedures, exporter needs to spend additional expenses also.
Undeniably, compared to other modes of payment, the expenses for opening,
negotiating and other procedures of letter of credit is high.
Currency fluctuation is another disadvantage of Letter of credit. Normally
buyer/importer places purchase orders once in a year and opens letter of credit
accordingly. The exchange rate may differ at the time of shipping goods, from
the time of opening LC. The exporter receives payment after shipment. So, if
any loss due to fluctuations in foreign currency contracted under letter of credit,
need to be beard by him.
Liability: An exporter must verify the authenticity of opening bank. The Letter
of Credit opening bank should be a prime banker. There are many cases of
fraudulent LC opening bank who were not a prime banker and did not have
proper stand to follow the guidelines of uniform customs and practice of
documentary credit. So the strength and stability of LC issuing bank is a prime
factor while discussing about the demerits of Letter of Credit.
While accepting a letter of credit, the exporter guarantees to meet the
requirements of buyer as mutually agreed as per the terms and conditions
13
 mentioned in letter of credit. So the liability of meeting all required parameters
are with supplier failing which bank may not accept documents under such
transaction. Bank may debit certain charges against the discrepancy of
documents also if proper documentary proof has not been submitted along with
other shipping documents. So, if the exporter does not follow strictly with the
terms and conditions of letter of credit with 100% compliance of
documentation, the payment will not be effected by bank.
Political barrier: Policy of a country may affect the business transaction
between countries. If a cold war is being continued between two countries, due
to political reasons, the trade bilateral agreement between such countries may
become void, resulting to affect the guidelines of uniform customs and practice
of documentary credit. This is another demerit of LC for a seller. A best caliber
of personnel is required to monitor and navigate the process of letter of credit to
provide no room for even minute discrepancy of documents.

III. Risks analysis

The main parties, which involve in the process of letters of credit, are exporter,
importer, and banks. The same as any payment pattern, all of these parties bear
different risks. The author, hereinafter, would like to analysis the risks for each party
based on the two principles of credit. The cases, which are provided by bank of China
Peking branch, the author takes the analysis with some real case between Chinese
companies and foreign companies.

1. Exporters risks
As the beneficiary of letter of credit, if there are risks for the transaction, the exporter
should be the first one who will bear the risks. Generally, the risks for exporter may
come from the importer.

Breach of strict compliance

The importer applies the letter of credit from an issuing bank without strict compliance
with the contract. The terms and conditions of credit should be in compliance with the
contract. In many cases, however, the importer do not open/issue the credit based on
the sales contract because kinds of reasons.

14
 This behavior makes difficult for the performance of contract difficult, or leads the
added loss on exporters. The most frequent situations are: importers do not open the
credit on time or do not apply the credit from banks at all. For example, in the case of
concerning market change, strict restriction for the foreign currency, the importer will
alter the time or delay the time to open the letter of credit. The importer adds some
accessional clauses in the credit, for example, the importer may upgrade the kind of
insurance; increase the amount of insurance; change the port of destination; change the
packing, in order to get the purpose of changing the contract. Or the importer may
make many restrictions on the credit, which is considered as the flexible clauses 1.

Setting barriers in malice

By using the crucial principle of letters of credit---strict compliance of documents

and credit, the importer adds some conditions that are hard to achieve, or sets some
business trap on purpose. Such as unconfirmed clauses; credit with words mistakes
and conflicted clauses on content. It is not only a piece of cake that there are some
words mistakes on letters of credit. Those mistakes can be the typing mistakes of the
beneficiarys name, address, shipment, the expiry time, and so on. The mistakes may
affect directly the documents that must submit, and sometimes it will be the excuse for
rejection of payment by the issuing bank.

Bogus letter of credit

If importers use the bogus letter of credit, or steal the letter of credit with vacant form
from a bank, or get the credit from a clerk who worked in a bank that has been or is
going to be bankruptcy, the exporters may face the calamity of losing both goods and
money. There is such a case used to happen in a Chinese company.2
A trade company, which is in HeNan province in China, has received a documentary
credit from a British bank. The name of the British bank is standard chartered bank,
Birmingham branch, England. The amount of the credit is USD 37,200,000 and the
advising bank is National Westminsterbank, London. Since the credit cannot be

1 Flexible clauses: In background section 8.

2 Case from the bank of china, which provided by the worker in bank of china perking branch.
15
 advised by the local bank of beneficiary3 as usual, it is hard to confirm the authenticity
of the credit. After the examination to the credit from a Chinese local bank, there are
some doubtful points:

a. The form of letter of credit is not dated; no consignor address on the face of

envelope; it is impossible to recognize the post address because of the

ambiguous letter stamp.
b. The credit appoints the advising bank --- National Westminster bank as the

negotiating bank, which is deviant.

c. The address of accepting bank cannot be found in the bank yearbook.

d. The significant of credit is printing words instead of handwriting, which

cannot be identified.
e. The goods are required to transport by air to Nigeria, where always happen

the credit fraud cases.

According to the doubtful points above, the letter of credit is considered to be a bogus
credit on the appearance.

Requests of special documents

The importer asks for the documents that are hard to achieve. Some importers regulate
the requests that cannot be fulfilled or controlled by the exporters. Such requests may
be: under the terms of FOB4& CFR5, the exporter can ask the payment only within the
return receipt of insurance; or the documents with some specific signature.
For example, according to the clauses of credit, the importer asks the beneficiary to
provide the certificates for the quality, quantity, and price of the goods. These
certificates must be issued by the commodity inspection bureau. Basing on the
regulation of commodity inspection authority in most countries, however, the authority

3 The advising bank should be a local bank in the country of exporter based on the international
convention. In this case the advising bank should be a Chinese bank.

4 FOB: In background section 9.

5 CFR: In background section 10.

16
 can only issue the certificates for the quality and quantity of the commodity.
Commodity price is considered to be a business factor, which does not belong the
responsibility of the inspection process. This request is the typical example of the
clause, which exporters cannot achieve.

Conflict between clauses of credit and related law

The clauses of credit are not accordant with the law of related country. In the real
practice of international trade, some clauses in the credit are advantage to the exporter
on the appearance. The noticeable point is that if the clauses are allowed according to
the law of importers country. The exporter should know the law in related country,
and negotiated the clauses that cannot be implemented in the importers country.
Otherwise, the exporter will not only loss the advantage in contract, but also involves
in the restriction of another national law. For example, the accrual and final discount
fee is responsible by the importer according to the letter of credit. The reasons are:
citizens should turn in the income tax of the interest based on the national or state law.

There is a case involving the different tax law between China and France 6. A Chinese
exporter company finances a deferred letter of credit. The French importer company
made agreement with the Chinese export company that the French company is going
to be responsible for the entire fee caused by the accrual. This agreement is also
accordant to the Chinese tax law. Whereas the French tax law is different on such
regulation. Based on the French tax law Art.125, Paris National bank made bold to
deduct 30% accrual tax from the whole accrual that the beneficiary (the Chinese
export company) should get. Both the importer and exporter know that the levied
object is the French importer company. Furthermore, Italy and Cyprus have the same
tax regulation as France. As the exporters, merchandisers should think more about the
law in another country, and negotiate with the importer for the clauses that may
involve deducting the income tax of accrual.
Another law problem is on insurance with a case as follows. A British bank issued a
letter of credit and the clauses of credit ask for insuring in both London Association
insurance company and insurance company of P.R.China. The Chinese exporter should

6 Case is provided by bank of china, Peking branch.

17
 buy the all risks7 from London Association insurance company, and buy the war
risks47 in insurance company of P.R.China. Although these two different insurances
can insure at the same time, based on the regulation of insurance company of
P.R.China, the client cannot insure in a Chinese insurance company and a foreign
insurance company in simultaneity. The exporter only can choose one insurance
company.

Fraud by altering letter of credit

Importers alter the overdue letters of credit purposely. The exporter may be cheated for
their goods by this altered credit. Importers change the amount, the date of shipment,
and beneficiarys name of the overdue credit. With the purpose of finance the money
by a credit from the bank, importers may prevail the exporters on issuing the credit.
The correlative case in China happened on a trade company in JiangSu province. 8 The
JiangSu trade company received a letter of credit, which was delivered by a
HongKong client though the bank. The amount of the credit is USD 3,180,000. The
branch bank of China found the obvious altered traces on the credit by auditing the
credit. The credit has been altered the amount, date of shipment, name of beneficiary.
The branch bank of China reminded the beneficiary (JiangSu trade company), and
inquired about the credit from the issuing bank immediately.
At last, it is substantiated as a fraud case by using the overdue credit. The HongKong
Company tried to give the overdue credit to the exporter, then use it as a mortgage and
get money from the bank.

Other risks out of the essential of letter of credit

The content of clauses is not belonging to the essential of letter of credit deal. If the
letters of credit regulates that the negotiating bank pay only when commodity arrives
the destination, after the eligibility of commodity inspection, or after getting the ratify
foreign currency manage authority, these are not the transaction point of credit, and
there is no guarantee for the exporters.

7 All Risks: In background section 11.

8 Case is provided by bank of China, Peking branch.

18
2. Importers risks
The author discusses the possible risks on the side of exporters; whereas, the importers
should also bear some risks when use letter of credit. The author would also choose a
case9 study hereinafter to analysis the risks on the side of importers.

Chinese company A made a contract with a British company B. Company A will

import steel from company B. The amount of commodity is USD 5,040,000, and the
parties decided to pay with letter of credit. As the importer, company A opened the
letters of credit through an issuing bank in China. During the period of validity of
shipment, company A received the fax from company B and was informed that the
steel had been in shipment on time. Soon, the issuing bank received the whole set bill
of documents from negotiating bank. According to the bill of lading, the goods are
loaded on a port of Eastern Europe, and transferred to china from a port of Western
Europe. There was no discrepancy after auditing the documents. The issuing bank
discounted the credit to company B according to the normal procedure. Company A
felt weird after waiting for one month without any message of the goods. Company A
inquired about the matter to London maritime affairs bureau. The feedback is: there
was no named ship loading the steel on the given date that is offered by company A.
The case is concluded as a typical fraud case by forging the bill of documents. When A
realized that, issuing bank had discounted and the negotiating bank had paid to the
beneficiary. Company A faced a big loss.The key issue of this case is that how much
risk to the importers under the transaction of letter of credit. When people talk about
UCP 500, the convention protects beneficiary much more than the applicant. That
means, exporters get more protection from the UCP 500 more than the importers.
From this profile, the author would discuss the risks on importers with the following
statement.

Fraud risks

As the case described above, the operation of letters of credit may be considered as an
operation of documents. The related parties finish their responsibility based on those

9 Case is provided by bank of china, Peking branch.

19
 bill of documents. The only evidence for issuing bank is the strict compliance between
documents and credits. As long as the documents are in strict compliance, the issuing
bank has to pay. According to UCP 500 Art.1510 Bank assumes no liability or
responsibility for the form, sufficiency, accuracy, genuineness, falsification of any
document(s), nor do they assume any liability or responsibility for the good
faith or acts and/or omissions, solvency, performance or standing of the related
parties. Bank forms a tradition that they only examine the authenticity of the
documents on their face, and pay no need to the essential reality of the documents.
Furthermore, to examine the essential reality of the documents has exceeded the
specialty ken of banks, so banks cannot do more on that. Although banks must
examine all documents stipulated in the credit with reasonable care 11. UCP 500
Art.13, and Art.15 regulate the disclaimer on effectiveness of documents 12 for
the banks. The principle of strict compliance provides the soil for fraud under the
terms of letters of credit.

Quality risk

The quality risks, which importers should bear under the term of letters of credit, are
that exporters trade importers with the shoddy commodity. From the characteristic of
documentary deal 13 under the terms of letter of credit, the importer can get the whole
set of documents to pick up the goods only after payment or discount. Before this, the
importer cannot know if the exporters provide the commodity with good quality. The
importers will stand on the passive side. Moreover, if the importer find the quality
problem of the commodity after payment or discount, it is hard to get the protection
through the legal way.

Exchange rate risk

10 Art 15, disclaimer on effectiveness of documents, UCP 500.

11 Art 13, standard for examination of documents, UCP 500.

12 Under the terms of LC, documents are considered as the exclusive evidence to meet the payment.

13 What is the documentary deal for LC

20
 No matter what kind of letter of credit (insight letter of credit or deferred letter of
credit), there is a time distance from issuing letter of credit to the actual payment for
importers. This long time distance may cause a big fluctuant of the exchange rate. If
under the term of insight letter of credit, there is a time distance from the credit issuing
date to consignment, and arrival of document in the issuing bank. Then also the time
for documents examination should be plused. If under the term of deferred letter of
credit, the time distance will add the time from acceptant date to expiry date.
In international trade, the longer the time lasts, the more exchange rate risks exist.
Once the exchange rate of paying currency increasing14, the importer has to pay more
than the anticipative amount. There is an adage that exchange rate is more ferocious
than tiger, which describe the big risk caused by exchange rate.

Marketing risk

The import commodity may face a marketing risk, whether they are the material for re-
machining or the goods which access the trade circulate directly. In case, the price of
the same goods in domestic market goes down, then the relative price of import good
rises up. It will affect the goods circulation of the market, and causes the overstock56.
Even the import goods, which used for re-machining, may also cause the high cost of
the new finished product.15 These will lead the loss of importers.

Banks risks

Under the term of letter of credit, a bank may add its name to a transaction by
providing payment risk security. As the basic principle of letter of credit --- strict
compliance for the documents and credit, in the authors opinion, examination of the
documents is the main risk for banks.
there is no room for documents which are almost the same, or which will do just
as well if the bank does as it is told, it is safe; it declines to do anything else, it is
safe; it departs from the conditions laid down, it acts at own risk16

14 exchange rate of a currency increasing can be also considered as the appreciation of that currency

15 See figure 5.4.

16 Cited in Ramberg (international commercial transactions) page 144.

21
A British court developed this statement about strict compliance in 1927. The principle
of strict compliance is ruled in Art.13 and Art.15 of the UCP 500. Banks are no experts
regarding goods and trade. They do not have enough knowledge to judge about goods
and they cannot overview the terms and conditions between the applicant (importer)
and the beneficiary (exporter).
The risk therefore exists that there are discrepancies on the credit when they found the
obviously discrepancies. Those discrepancies may come from the result of fraudulent
document, and cause big damage to the bank and beneficiary. Art. 15 of UCP 500
contain a disclaimer for the risks of bank. However, banks can be liable for losses and
damages, if a bank does not fulfill its obligation to examine the documents in a
reasonable way.

22
 Conclusions and future study
Letter of Credit is a secured method of payment that protects both importers and
exporters. However, there are advantages and disadvantages existing in this method,
and also the risks that both parties have to bear to enter this way of payment. To the
importers, L/C helps to save time, strengthen security and boost efficiency but only
with strict compliance and at a relatively high cost. Like the importers, exporters also
take the advatages of this time-saving, secured and efficient method, but they have to
have more liablities and be cautious with the political barriers. Entering a letter of
credit is the most favored way of transactions for big contract with high value, but that
doesnt mean there are no risks taken. Both parties need to bear certain threats. As the
beneficiary of letter of credit, the exporter should be the first one who will bear the
risks. Generally, the risks for exporter may come from the importer, such as breach of
strict compliance, setting barriers in malice, bogus letter of credit, requests of
especial documents, conflict between clauses of credit and related law, fraud by
altering letter of credit, and some other risks. As the recipient of the goods and the one
who pays, importers need to care about fraud, quality, exchange rate, marketing
risks, diathesis risk of the issuing bank and other banks risks.
In this research paper, we only analyse all the advantages, disadvantages and risks that
importers and exporters need to pay attention to, using payment made by documentary
letter of credit. Since we are not able to study the cases further due to lack of time and
faculities, we hope that we have led you through all the process of using a Letter of
Credit and given you a very close look of what both parties have to go through to
make a successful purchase. We suggest future works to work further in how to
minimize the risks and perhaps study into a new payment method even more effective
than documentary Letter of Credit.
At last, we thank Mrs. Phan Kim Thoa for her incredibly useful lessons which guide us
through. And we hope you to forgive all the flaws there may be in research paper.
Thank you very much!

23
 References
1. MA Phan Kim Thoa, English for specific purposes, International Business,
Hanoi, Vietnam, 2017.
2. Cranstom.Ross, Principle of banking law, Oxford, New York, Athens 1997,
page 158.
3. French tax law, French corporate taxation-a brief overview.
http://www.triplet.com/40-10-corporate/40-70-taxlaw.asp.

24