LETTERS OF CREDIT ISSUED BY NON-BANK ISSUERS: RISKS AND SOLUTIONS

By Nguyen Huu Duc (Mr. Old Man)

Recently, the author has received numerous questions from colleagues at banks and from exporters regarding letters of credit (LCs) issued by non-bank issuers via SWIFT message MT 710. In many cases, not only the exporter but also the bank has ended up “tasting the bitter fruit” from dealing with such LCs.

This article presents a number of risk scenarios involving LCs issued by non-bank issuers via MT 710 and proposes measures to mitigate those risks.

What is MT 710?

MT 710, as its name suggests—Advice of a Third Bank’s or a Non-Bank Issuer’s Documentary Credit—is a SWIFT message type used by an advising bank to notify the beneficiary or another advising bank of the terms and conditions of an LC issued by a third bank or a non-bank issuer.

SWIFT and the ICC agree that non-bank issuers may issue LCs, provided that when an LC from a non-bank issuer is received via MT 710, the advising bank must inform the beneficiary or another advising bank of the non-bank status of the issuing entity and state clearly the limited role of the advising bank. The ICC notes that if the advice format in any way suggests that the LC issuer is a bank, or may lead to a misunderstanding that it is a bank, the advice must clearly state the non-bank status of the issuer to avoid confusion.

The Vietnam Banks Association also adds:

“Of course, if the LC’s issuance format causes the beneficiary to believe that the issuer is a bank, the advising bank may be held liable.”

An LC issued by a non-bank issuer may also be subject to UCP 600, and the non-bank issuer then has the same obligations as an issuing bank—namely, to honour payment upon a complying presentation. Having the LC advised, and the documents presented through a bank helps ensure the LC’s authenticity.

However, similar to bank-issued LCs, LCs issued by non-bank issuers involve risks relating to the issuer’s creditworthiness and reputation and country risk. Exporters should therefore consider carefully whether to accept an LC issued by a non-bank issuer.

Risk Scenario 1

A colleague at Bank V in Vietnam sought the author’s advice on a case involving an MT 710 received from Bank U in Ukraine, with the following details:

50B: Non-bank issuer: Company E in Zambia
50: Applicant: Company A in Zambia
59: Beneficiary: Company B in Vietnam
32B: Currency, Amount: USD 2,000,000
44E: Port of Loading: Any port in Cameroon
44F: Port of Discharge: Any port in UAE
45A: Description of Goods: Gold
49H: Special Payment Conditions:

We (Bank U) relay this MT 710 against MT 710 we received from Bank X under their reference no. XXX. Please relay it to Bank Y in Vietnam. We relay this MT 710 without adding our confirmation and without any risk or responsibility. No fees can be claimed from us.

Questions:

1. Is the MT 710 relayed from Bank U to Bank V an authenticated message?
2. Would Bank V bear any responsibility if it relays this LC to Bank Y for advising to the beneficiary as instructed by Bank U?
3. If Bank V wishes to refuse to relay the MT 710 to Bank Y, on what basis under UCP 600 can it do so?

Analysis and conclusion:

From the LC’s terms and the parties involved, several risks are apparent:

1. The LC has a high value (USD 2,000,000) but is issued by a non-bank issuer in a less developed country.
2. The beneficiary is in Vietnam, but the port of loading is in Cameroon.
3. The MT 710 has been “relayed” through multiple banks, possibly to conceal fraudulent intent, with the potential for the LC being forged or used for money laundering.
4. Bank U deliberately used the term “relay” instead of “advise” (as in MT 710’s title) to avoid liability if the LC is fraudulent.

Answers to Bank V:

1. MT 710 is an authenticated SWIFT message between Bank U and Bank V. However, Bank U’s deliberate use of “relay” seeks to disclaim responsibility if the MT 710 it received earlier was fraudulent.
2. Bank V could face joint liability if it relays the MT 710 to Bank Y without informing Bank Y and the beneficiary of the issuer’s non-bank status.
3. Bank V should conduct KYC on all parties involved before deciding whether to refuse to relay/advise the MT 710 to Bank Y to avoid joint liability if the LC is fraudulent or linked to money laundering.

Under UCP 600 Article 9(e), a bank may refuse to advise an LC or amendment and must promptly notify the bank from which it received the LC or amendment. Therefore, Bank V can inform Bank U of its refusal to relay the MT 710 to Bank Y without citing any of the above reasons.

It should also be noted that even genuine LCs issued by non-bank issuers carry significant risks. In addition to concerns over the issuer’s creditworthiness and ability to pay, non-bank issuers do not use SWIFT for bank communication, and the handling of documents presented under the LC may not comply with UCP 600. Non-bank issuers are often located in developing countries without mutual legal assistance treaties with Vietnam, making court action and enforcement difficult in case of disputes.

Risk Scenario 2

A colleague at Bank C sought advice on a case involving an LC advised via MT 710 as follows:

Company ABC (France) signed a contract to import cashew kernels from Company XYZ (Vietnam), payment by LC worth USD 500,000, available by negotiation.

The LC was advised to Company XYZ via MT 710 through several advising banks, including Bank A in Côte d’Ivoire, Bank B in UAE, and Bank C in Vietnam. Field 52D showed the issuing institution as Bank X in Martinique. The LC required documents to be presented at Bank C for negotiation

Company XYZ shipped the goods and presented complying documents to Bank C. However, instead of negotiation as instructed, Bank C sent the documents to Bank X.

After the prescribed period, Company XYZ still had not received payment from Bank X, despite shipping company records showing the importer had received the goods.

At Company XYZ’s request, Bank C sent a SWIFT message to Bank X requesting the return of the documents, but this was impossible because the SWIFT code for Bank X stated in the LC was fake. A search in Bankers Almanac confirmed that Bank X did not exist. Bank C also contacted Banks A and B, which had advised the MT 710, but received no response.

Company XYZ is considering suing Bank C for advising a fraudulent LC.

 Questions:

1. Is the MT 710 received by Bank C from Bank B in UAE considered authenticated?
2. If authenticated, is Bank C liable for advising a fraudulent LC?

Analysis and conclusion:

1. MT 710 is an authenticated SWIFT message between the sending and receiving banks. Therefore, the MT 710 Bank C received from Bank B is considered authenticated.
2. Whether Bank C is liable depends on how it advised the LC to Company XYZ.

According to SWIFT guidance, Field 52a in MT 710 identifies the LC’s issuing institution and can appear as Option A (52A) or Option B (52D). Option 52A shows the bank’s name with a valid SWIFT code, while 52B shows the name and address of the issuing bank.

In this case, the fraudsters deliberately used Field 51D to create the illusion that the issuer was a bank, when in fact it did not exist.

Had Bank C performed KYC on the issuing bank before advising the LC, it would have discovered the truth and either refused to advise the LC to Company XYZ or advised it with a warning that the issuer’s SWIFT code was invalid.

The lesson from this LC transaction is that both Company XYZ and Bank C failed to properly follow the process for advising, receiving, and checking an LC’s contents, and did not perform KYC on the parties involved—particularly when the LC was advised via MT 710 through multiple obscure banks in high-risk jurisdictions. Proper due diligence would likely have identified the LC as fraudulent and prevented losses to both exporter and bank.

Risk Mitigation Measures

For advising banks:

• When advising MT 710 from a non-bank issuer, in addition to noting any unfavourable LC terms, check Field 52a (Issuing Bank) and Field 50B (Non-Bank Issuer) to determine whether the LC is from a bank or a non-bank issuer.
• If from a non-bank issuer, advise the beneficiary of the issuer’s non-bank status so they can decide whether to accept or refuse it.
• Even when the LC shows a bank as issuer, particularly if in Field 52D, verify that the bank exists.

For exporters:

1. When receiving an LC via MT 710, check whether the issuer is a bank or a non-bank issuer.
2. If from a non-bank issuer, investigate why it was not issued by a bank.
3. Review the issuer’s financial standing through your bank.
4. Review the importer’s financial and business situation.
5. Check all LC terms to ensure performance and the ability to present complying documents.
6. Check Field 40A and/or Field 49 to see whether the LC is confirmed by the first or second advising bank.
7. A confirmed LC from a reputable, financially sound bank may still be acceptable even if issued by a non-bank issuer.

Final note: The author hopes this article will help banks, exporters, and LC practitioners better recognise and guard against the risks associated with LCs issued by non-bank issuers via MT 710.

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Nguyen Huu Duc (Mr. Old Man)