WHERE LC REQUIRES PRESENTATION OF FCR INSTEAD OF BL

QUESTION

Dear Mr Old Man,

May I ask some questions about the risks of “requiring documents relating to the transportation of goods in L/C operation” as follows:

1. When opening L/C, why do banks usually discourage applicant from requiring the documents such as FCR, Mate’s Receipt, Delivery Note… instead of Bill of Lading? What are the risks here?

I have read your reply on the following link, which you meant that besides submitting FCR to the bank, there is a separate set of bill of lading which may go directly to the applicant, and the bank loses control over the goods.

Besides this, can you share is there any risk else?

NEGOTIATION UNDER LC AVAILABLE BY PAYMENT WITH ISSUING BANK ; FORWARDER'S CERTIFICATE I/O BL

2. In case Applicant requires such above documents when issuing L/C, what measures must the issuing bank take to control/reduce the credit risk of applicant?

3. In addition, do you have any source of materials of ICC or web that discuss about this topic?

Hope to have your opinion on this.

Thanks & regards,

Amy
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ANSWER

Hi,

1/ Bill of lading is a document of title or a legal document that proves that someone owns the goods or has the right to take control of them. For this reason, the issuing bank would insist the bill of lading be issued to its order to control the goods until the applicant has fulfilled his obligation under the agreement for letter of credit signed between the applicant and the issuing bank.

FCR is a document of title. So, the issuing bank that keeps the FCR does not have the right to control the goods. If full set of bills of lading made out to order blank endorsed or made out to the order of the applicant are sent directly to the applicant, the applicant can take delivery of the goods and in the worst case scenario he may try to avoid fulfilling his obligation towards the issuing bank, i.e., the issuing bank may be exposed to the risk of non-payment by the applicant.
As documents without original bill of lading can be forged easily, the seller and the buyer may collude together to defraud the issuing bank by presenting forged documents or they may use this method to launder their dirty money.

There may be unidentified risks that cannot be measured. Related trade officers/managers may be responsible to his bank for agreeing to issue the letter of credit with such risky terms and conditions…

2/ If the issuing bank must accept to issue the letter of credit that requires presentation of FCR instead of original bill of lading, it must ensure that the applicant is a creditworthy customer and/or has collateral (pledge, security deposit) to cover any payment under the letter of credit.

3/ No ICC materials are available.

Kind regards,

Mr. Old Man