ENDORSEMENT OF DRAFTS UNDER A LETTER OF CREDIT – WHO OWNS THE PROCEEDS

QUESTION

Dear Mr. Old Man,

I have 2 questions that need your expertise clarification:

1/ Does the act of endorsement of drafts by the LC beneficiary to presenting bank mean the transfer of beneficial right?

2/ Must the beneficiary endorse the draft to the presenting bank to authorize it  to claim reimbursement/payment from the issuing bank?

Thank you so much for your time and response.

K. Ly

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ANSWER

Hi,

1. Does endorsement of a draft by the beneficiary to the presenting bank mean the beneficial right has been transferred?

Not necessarily. Why?

• When the L/C beneficiary endorses the draft to their bank, it’s usually done to authorize the bank to present the draft and claim payment, especially in cases where the draft is negotiable (drawn “to order”).
• However, this does not automatically mean the presenting bank becomes the beneficial owner of the proceeds.
• Unless the presenting bank has purchased, negotiated, or discounted the draft (i.e., taken it with recourse or as principal), it is typically acting only as the beneficiary’s agent.
• The beneficial right remains with the beneficiary unless there’s an express agreement transferring ownership.

Bottom line:

Endorsement gives the bank the right to act, not necessarily the right to own. Beneficial ownership is a matter of legal and commercial arrangement, not just a matter of endorsement.

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2. In an L/C transaction (still valid), must the beneficiary endorse the draft to the presenting bank to authorize it to claim reimbursement from the issuing bank?

No — not if the draft is already drawn in favor of the presenting bank. Why?

• In standard L/C practice, when a draft is used, the beneficiary often draws the draft “payable to the order of [presenting bank]” (e.g., “Pay to the order of Bank ABC”).
• This format gives the presenting bank the legal right to present the draft and claim payment without requiring any endorsement from the beneficiary.
• The presenting bank, in turn, can endorse the draft as needed (e.g., “Pay to the order of issuing bank” or “any bank”), allowing it to pass through the payment chain.
• This setup is efficient, clean, and avoids unnecessary handling of endorsements.

Bottom line:

There is no need for the beneficiary to endorse the draft if it’s already drawn to the order of the presenting bank. That bank already has the authority to present it for payment under the L/C.

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Final takeaway:

• Endorsement ≠ ownership, unless there’s a sale or negotiation agreement.
• If the draft is drawn to the order of the presenting bank, that’s usually all that’s needed for the bank to act.
• The structure of the draft and the terms of engagement matter more than whether there’s an ink signature on the back.

Best regards,

Mr. Old Man