WHEN DOES A CONFIRMING BANK INSIST ON INCLUDING A REIMBURSING BANK IN AN LC?

Intro

From time to time, confirming banks request that an LC be amended to nominate a reimbursing bank, or even to obtain a reimbursement undertaking.

A reader recently asked whether this practice is supported by ICC rules, or whether it is simply a matter of banking practice and risk management.

It is a good question, because many practitioners assume that reimbursement arrangements are purely operational, while in reality they can be an important tool for controlling reimbursement risk—especially in higher-risk situations.

Here is the question and my reply.

QUESTION

Dear Mr. Old Man,

I hope you are having a good day.

Referring to your article “Bank to bank reimbursement under LCs” (March 5, 2010), I would like to ask:

If a nominated bank is adding its confirmation to an LC, can it request the issuing bank to amend the LC to include a reimbursing bank in order to secure reimbursement?

Is there any ICC opinion or rule in this regard?

Seeking your guidance.

Regards,

Faisal

________

ANSWER

Hi Faisal,

If I understand your question correctly, you are asking whether a confirming bank may request the issuing bank to amend the LC to nominate a reimbursing bank in order to secure reimbursement.

The short answer is: Yes, it may request this — but it is a commercial requirement, not an ICC rule.

Neither UCP 600 nor URR 725 requires an LC to nominate a reimbursing bank. However, a confirming bank assumes the risk of honouring or negotiating and therefore may impose conditions before agreeing to add its confirmation. One such condition may be:

• nomination of a reimbursing bank acceptable to the confirming bank; and
• in some cases, issuance of a reimbursement undertaking by that reimbursing bank.

This is purely a matter of risk management.

A Practical Example

More than 30 years ago, I experienced a case illustrating this practice.

At that time, international payments related to Vietnam were perceived as high risk, particularly for USD transactions. Exporters and their banks were concerned about the possibility of blocked or delayed payments.

In one transaction, our bank issued an LC of about USD 1.5 million to an Italian beneficiary. The advising bank informed us that they would add confirmation only if one of two conditions was met:

1. A 100% cash deposit with the confirming bank; or
2. Amendment of the LC to nominate a reputable European reimbursing bank, which would issue a reimbursement undertaking.

We chose the second option. However, the reimbursing bank agreed to issue the undertaking only after funds were effectively secured.

This experience illustrates a practical reality:

When country risk, bank risk, or political risk is perceived to be high, confirming banks often seek additional reimbursement comfort.

Conclusion

A confirming bank may request:

• nomination of a reimbursing bank, and
• issuance of a reimbursement undertaking

as a condition for adding confirmation, particularly in higher-risk situations.

For further reading, you may refer to URR 725, which governs bank-to-bank reimbursement arrangements.

Hope this helps.

Best regards,

Mr. Old Man