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TRANSFERABLE LC or BACK-TO-BACK LC?

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QUESTION

Hi Mr. Old Man,

My name is Genevieve from Indonesia. It is my dream to run a commodity trading company one day.

First of all, thank you for all the informative posts. It’s not everyday that I can learn from someone with 31 years of experience for free.

I left a comment in your blog but thought emailing you would fetch a faster response.

I have several questions about L/C and international trades, if you don’t mind.

1/ In a transferable L/C (MT720), can I choose not to disclose the identity of the second beneficiary (my supplier) to my buyer? I have heard that there are always two beneficiaries named in a transferable L/C as shown in the attached picture. Obviously, I want to prevent my supplier and buyer from knowing each other to avoid being bypassed.

2/ I don’t have a line of credit with my current bank nor enough assets to issue a separate L/C for my supplier. But if my buyer issues a non-transferable L/C for me, will I be able to use that L/C as a collateral to issue another L/C for my supplier? It’s called back-to-back L/C if I recall correctly.

3/ If I have to disclose my supplier’s name in a transferable L/C, surely I won’t go that route. I am quite sure you have heard about the assignment of proceeds. Do I need to have a certain amount of assets to issue an assignment of proceeds?

4/ Is a switch bill of lading viable to prevent my buyer from knowing my supplier?

Thanks in advance!

Genevieve

N.B: If you choose to post this to your website, kindly refrain from including the picture in the post.

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ANSWER

Hi,

I would like to answer your questions as follows:

1/ MT 720 swift message is used by the transferring bank to advise the transfer of the LC, to the bank advising LC to the second beneficiary. It contains the name of the first beneficiary (i.e., the broker/intermediary) and the name of the second beneficiary (i.e., the supplier), and it does not contain the name of the applicant (i.e., the buyer in the original LC). So, the supplier and the buyer do not know each other unless some document required by the LC indicates the name of the buyer. So, you need to avoid this requirement when you work with the buyer with regard to the LC in favor of yourself as the first beneficiary.

2/ In a back-to-back LC transaction, there are two separate LCs: the master LC and the baby LC. If you don’t have a credit line with your bank, I am afraid the bank is not willing to accept the master LC as collateral to secure the baby LC that is issued by it at your request. The bank may request you to deposit funds or have other assets as collateral for its issuance of the LC.

3/ Assignment of proceeds is provided at article 39 UCP 600 as follows:

“The fact that an LC is not stated to be transferable shall not affect the right of the beneficiary to assign any proceeds to which it may be or may become entitled under the LC, in accordance with the provision of applicable law. This article relates to the assignment of proceeds and not to the assignment of the right to perform under the LC”.

I understood from your question that the buyer will open LC in your favor and you will arrange with the supplier to effect shipment to the buyer under the LC and you will assign the proceeds received from the issuing bank to the supplier. If you, you need to arrange with the supplier on terms and conditions of the assignment of proceeds. Whether or not the supplier requires you to have assets or a bank guarantee to secure the transaction or not depends on the supplier and your relationship with the supplier.

4/ You may switch bill of lading to prevent the buyer and the supplier from knowing each other in case the LC requires the bill of lading to indicate the supplier as the shipper or the buyer as the notify party… However, this is complicated, and you must obtain an agreement in advance with the shipping company.

CONCLUSION

Transferable LC is better and more convenient for you as the bank is willing to transfer the LC at your request. In the transferred LC, it undertakes to pay the second beneficiary only after receipt from the issuing bank of the proceeds under the original LC. It does not require you to deposit funds or pledge any collateral.

My advice is that you should choose a transferable LC which you can transfer to the supplier. It is simple, requires no collateral and is the best choice.

Best regards,

Mr. Old Man

 

 

 

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