Checking documents under a Letter of Credit (LC) is a critical process in trade finance that involves verifying the compliance of all documents presented with the terms and conditions of the LC. This process ensures that the documents are to the buyer's requirements, the terms of the sales contract, and the regulations governing international trade. Here are the professional steps for a banker to check the documents under an LC:
1. Review the Letter of Credit
- Understand Terms and Conditions: Start by carefully reviewing the LC to understand all its terms and conditions, including the type of LC, expiration date, amount, currency, and any special instructions or conditions.
- Check for Discrepancies: Look for any discrepancies between the LC and the sales contract to ensure that the LC accurately reflects the agreement between the buyer and seller.
2. Examine Each Document Carefully
- Document Checklist: Create a checklist of all documents required by the LC, such as commercial invoices, packing lists, bills of lading (B/L), insurance documents, certificates of origin, inspection certificates, etc.
- Authenticity and Compliance: Verify the authenticity and ensure each document strictly complies with the LC terms. Pay special attention to details like dates, names, addresses, quantities, and descriptions of goods.
3. Verify the Bill of Lading (B/L)
- Consignee and Notify Party: Ensure the B/L lists the correct consignee and notify the party as specified in the LC.
- Shipment Details: Check the loading and discharge ports, shipment dates, and description of goods to ensure they match the LC and sales contract.
- Endorsem*nts: If required, ensure the B/L is properly endorsed.
4. Check the Commercial Invoice
- Accuracy: Confirm that the invoice details match those in the LC and other documents, including the description of goods, quantities, price, and total invoice value.
- Incoterms: Verify that the Incoterms stated are consistent across all documents.
5. Inspect Other Required Documents
- Packing List: Ensure it matches the details on the invoice and B/L regarding the quantity and description of goods.
- Insurance Documents: Check that the coverage meets the requirements specified in the LC, including the type of coverage, amount, and validity period.
- Certificates of Origin, Inspection, and Others: Verify that these documents are present (if required) and comply with the specifications of the LC.
6. Look for Discrepancies
- Identify Discrepancies: Note any discrepancies between the documents and the LC terms. Discrepancies can include misspellings, incorrect dates, unauthorized marks, or any deviation from the LC conditions.
- Discrepancy Analysis: Assess the significance of each discrepancy to determine if it is minor (not affecting the substance of the documents) or major (affecting the compliance of the documents).
7. Communicate with the Involved Parties
- Notify the Applicant: If discrepancies are found, inform the applicant (buyer) promptly and seek their instructions on whether to accept the discrepancies or not.
- Consult with Legal or Compliance: For complex issues or uncertainties, consult with your bank's legal or compliance department.
8. Decision Making
- Acceptance or Refusal: Based on the applicant's instructions and your bank's policies, decide whether to accept the documents with discrepancies or refuse them.
- Payment Authorization: If documents are in order and compliant, proceed to authorize payment under the LC terms.
9. Record Keeping
- Document and Record: Keep detailed records of all checks performed, communications with parties involved, and decisions made for audit purposes and compliance.
10. Continuous Learning
- Stay Informed: International trade and LC regulations are subject to change. Stay informed about ICC (International Chamber of Commerce) updates, UCP (Uniform Customs and Practice for Documentary Credits) revisions, and industry best practices.
This process is meticulous and requires a keen eye for detail. Errors in document checking can lead to financial losses and legal issues, so thoroughness and adherence to LC terms and international trade regulations are paramount.
