CAN THE ISSUING BANK AUTHORIZE THE REIMBURSING BANK TO REIMBURSE DIRECTLY TO THE BENEFICIARY’S ACCOUNT?

QUESTION

Dear Mr. Old Man,

I ‘d like to ask you about rules or practice related to settlement process to beneficiary as follow:

Related parties in the LC:

Bank A: as issuing bank

Bank B: as presenting bank

Beneficiary C in the LC

Can bank A remit directly to beneficiary C‘s account rather than transfer to bank B’s account indicating LC ref as normal case?

Is there any mentioning related to settlement process by ICC so far?

We are as reimbursing bank who receives reimbursement authorization from issuing bank to reimburse directly to beneficiary C’s bank account finds it rather strange from practice.

Hope to receive your response soon! Thanks a lot for your valuable time!

TKL

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ANSWER

Hi,

In LC transactions, it is common practice that the issuing bank would pay in accordance with the presenting bank’s instructions, i.e., remit the proceeds to the presenting bank’s nostro account with its correspondent bank.

According to UCP 600 sub-article 6 (a), an LC available with a nominated bank is also available with the issuing bank. Where the beneficiary presents documents directly to the issuing bank bypassing the nominated bank or the beneficiary’s bank, the issuing bank can remit the proceeds directly to the account of the beneficiary in accordance with the beneficiary’s payment instructions.

According to the practice, reimbursement under LC is an arrangement between the issuing bank and the reimbursing bank. This arrangement is subject to URR 725 or UCP 600 sub-article 13 (b). Accordingly, the issuing bank, at the time of issuing its LC, will send a reimbursement authorization to the reimbursing bank instructing it to reimburse the claiming bank (a named nominated bank or any bank should the LC be available with any bank).

According to UCP 600 sub-article 13 (b), if the LC does not state that reimbursement is subject to URR 725, the issuing bank must provide the reimbursing bank with a reimbursement authorization that conforms with the availability stated in the LC.

In my opinion, where the LC states that it is available with a named nominated bank or any bank, the issuing bank’s authorization for the reimbursing bank to reimburse directly to the beneficiary’s account is inconsistent with the LC practice and contrary to URR 725.

Not very practical but in my opinion, if the claiming bank instructs the reimbursing bank to pay directly into the beneficiary’s account, then the reimbursing bank may do so.

Best regards,

Mr. Old Man

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FURTHER QUESTION FROM TKL

Dear Mr. Old Man,

Can I imply from your opinion that in case LC is available with issuing bank, not subject to URR 725, such direct transfer to beneficiary may be acceptable?

As in that domestic LC, applicant is allowed to directly present docs to the issuing bank, quoting bene’s acct number, which means no presenting bank appears in this preseatation. LC avail with issuing bank. UCP600 applied.

It’s not practical but what I’m finding is whether any ICC opinions do restrict this act.

Thank you.

TKL

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ANSWER

Hi,

Perhaps my answer was misunderstood.

Your first question is whether the issuing bank can remit directly to the beneficiary ‘s account rather than transfer to the presenting bank’s account and whether  there is any mention related to the settlement process by ICC so far.

My answer is yes and that is based on UCP 600 sub-article 6(a) which allows the beneficiary to present the documents directly to the issuing bank and the issuing bank can remit the proceeds directly to the beneficiary’s account as instructed by the beneficiary.

Now I would like to add more from ICC including ICC Banking Commission Technical Advisory Briefing No. 9 and ICC Opinion R518 (TA519rev.

According to the above ICC opinions, the obligation and undertaking of the issuing bank remain the same whether documents are presented via a nominated bank or directly to the issuing bank. In both scenarios, the issuing bank must honour provided the stipulated documents have been presented and that they constitute a complying presentation.

Nevertheless, ICC also noted that as a matter of good practice, when an LC is available with a named nominated bank, but documents are presented directly to the issuing bank, the issuing bank would be well advised to contact the nominated bank to inform them of the direct presentation (so that the nominated bank’s records can be updated) and to enquire of the details of any presentation(s) that have been made for which the issuing bank may be unaware. Whilst the examination of the presentation must be concluded by the close of the 5^th banking day following the day of presentation, settlement to the presenter can be delayed pending receipt of a response from the nominated bank. Any delay in settlement would be as a direct consequence of the presenter choosing to bypass the nominated bank.

The fact that the beneficiary presents documents directly to the issuing bank is appropriate for domestic LCs, especially when the beneficiary also maintains an account with the issuing bank.

I would like to add that under domestic LCs the beneficiary can still present the documents to the issuing bank via its own bank (presenting bank), especially when the beneficiary does not maintain an account with the issuing bank. In this case, the issuing bank, if not paying itself, can instruct another bank where the issuing bank maintains an account to pay directly to the beneficiary’s account (rather than reimbursing the negotiating bank as there is no negotiating bank involved).

Best regards,

Mr. Old Man