Can an Issuing Bank Advise an LC Directly to the Beneficiary?

One of the fundamental safeguards in documentary credits is the authentication process performed by an advising bank. But what happens if an issuing bank sends the LC directly to the beneficiary without involving an advising bank? Is this permissible under UCP 600, and what risks should the parties consider?

Let’s look at a question from Gerson Mário.

Question

Dear Mr. Old Man,

Good afternoon!

Can an issuing bank directly advise an LC to the beneficiary?

If yes, can you provide a general view of this structure, the risks to the parties, and whether it is covered under UCP 600?

Kind regards,

Gerson Mário

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Answer

Dear Gerson,

Thank you for your question.

UCP 600 Article 9(a) states that a credit and any amendment may be advised to a beneficiary through an advising bank. While the UCP clearly contemplates the use of an advising bank, it does not expressly prohibit an issuing bank from advising a credit directly to the beneficiary.

Therefore, an issuing bank may send a documentary credit directly to the beneficiary, particularly in domestic transactions where both parties are located in the same country. In practice, however, international credits are normally advised through an advising bank, which helps establish the apparent authenticity of the credit.

Where an issuing bank advises the credit directly to a beneficiary, the arrangement falls outside the normal advising process contemplated by Article 9. In such cases, the beneficiary should exercise caution and verify the apparent authenticity of the credit before making shipment or otherwise acting upon it. One way of doing so is to request its bank to verify the signatures, authentication details, or other evidence confirming that the credit genuinely originated from the issuing bank.

The principal risk of direct advising is the increased possibility of fraud or forgery, as the beneficiary does not benefit from the authentication procedures normally performed by an advising bank. For this reason, beneficiaries should not rely on a directly received credit unless its authenticity has been satisfactorily verified.

In short, direct advising by the issuing bank is possible and is not prohibited by UCP 600. However, it is uncommon in international trade because it deprives the beneficiary of the protection afforded by the advising bank’s authentication process.

Best regards,

Mr. Old Man