WHEN DOES THE CONFIRMING BANK INSIST ON THE LC TO INCLUDE A REIMBURSEMENT BANK?

QUESTION

Dear Mr. Old Man,

I hope you are having a good day.

Referring to your article “Bank to bank reimbursement under LCs” on March 5, 2010 I have asked a question.

If the nominated bank is adding its confirmation to LC, can it request the issuing bank to amend the LC to include a reimbursing bank to get control of payment?

Any ICC advice/opinion/rules in this regard.

Seeking your guidance.

Regards

Faisal Zaheer.

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ANSWER

Hi,

Honestly, I am afraid I may not understand your question correctly.

I understand your question as:

Should the confirming bank ask the issuing bank to amend the LC to include the reimbursing bank in the LC to ensure that the confirming bank will receive reimbursement from the reimbursing bank?

If so, my answer is YES.

If the Confirming Bank considers that it may face the risk of non-reimbursement from the Issuing Bank, it may request the Issuing Bank to amend the LC to include a reimbursing bank in the LC. The Confirming Bank may even request the Issuing Bank to authorize the reimbursing bank to issue a reimbursement undertaking to the Confirming Bank, if it considers it necessary, to ensure that the confirming bank will be reimbursed by the reimbursing bank once it has negotiated or paid the complying presentation under the LC.

I would like to share with you a story about a confirmed LC that I experienced more than 30 years ago.

More than 30 years ago, Vietnam was an underdeveloped economy because it had just gone through two wars with France and the US that lasted more than 100 years. After the defeat in the war with Vietnam in 1975, the US imposed a trade embargo on Vietnam that was not lifted until 1994. During that time, payment transactions in USD could be blocked by US banks at any time when they discovered that the payment transactions were related to Vietnam.

Therefore, to avoid the risk of non-payment, cautious exporters when dealing with Vietnamese partners with contracts worth millions of dollars often require the LC to be confirmed by leading banks in European countries and these banks only agree to confirm the LC with extremely unfavorable conditions such as the issuing bank must deposit 100% of the LC value as security or the LC must nominate a leading reimbursing bank in Europe and this reimbursing bank must issue a reimbursement undertaking to the confirming bank (claiming bank).

I remember once our bank (the largest international payment bank in Vietnam) issued a confirmed LC worth about USD1,500,000 to an Italian beneficiary to import a ceramic tile production line.

After receiving the LC, the advising bank informed us that they would confirm the LC if our bank met one of the following two conditions:

1/ We must transfer 100% deposit of LC value to the deposit account opened at the confirming bank; or

2/ Amend the LC to include a reimbursing bank which is one of the leading banks in Europe and the reimbursing bank must issue a reimbursement undertaking to the confirming bank.

(As you may know, the reimbursing bank may not make reimbursement unless it has issued a reimbursement undertaking).

Our bank had to choose the second condition. But the story did not end there. The reimbursing bank where our bank maintained the Nostro account only agreed to issue a reimbursement undertaking when we authorized it to hold the amount corresponding to the reimbursement undertaking.

In conclusion, I share this story to point out that large value LCs issued by banks in potentially risky countries can lead to the beneficiary not being paid even if the documents are presented in compliance. In this case, the beneficiary usually requests that the LC be confirmed by his bank or by a third bank which is a reputable top bank in the US or Europe and these banks can request the LC to nominate a reimbursing bank and in necessary cases, they also require the reimbursing bank to issue a reimbursement undertaking to ensure that the reimbursing bank will make the reimbursement.

Hope the answer is useful to you.

Regarding Bank-to-Bank Reimbursement Arrangement, you should refer to URR 725.

Best regards,

Mr. Old Man

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FEEDBACK FROM FAISAL ZAHEER

Hi,

I Hope you having a good day MR OLD MAN

I am always delighted to see your email, Your experience of many years enlightening our present and future.

You have understood my question and well answered.

I seek your guidance in future

God bless you, Take care

Regards

Faisal Zaheer