RISKS IN LC TRANSACTIONS

Dear HP,

Subject: Risks to exporter and importer in LC transactions

Documentary Credit (LC) is defined in UCP 600 Article 2 as any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation. That is to say, the exporter (beneficiary) will obtain the payment from the issuing bank if the documents presented are complying. In the event the documents presented are not in order, the issuing bank’s liability under the LC is released. The payment then depends much on the importer’s willingness.

There are some probabilities:
# The importer agrees to waive the discrepancies and pay.
# The importer agrees to pay if the exporter accepts a discount, for example, a reduction of 10% of bill amount.
# The importer does not agree to waive the discrepancies and hence refuses the documents. In this case, the exporter may have control of goods but he has lost physical possession of goods and has not received money.

He may face the risk of being unable to obtain the return of the goods as the importer’s country may not allow the goods to be returned.

The main risk to the importer is that the documents presented are complying and the issuing bank has paid the exporter but the goods obtained by the importer are not as ordered by the importer, for example, stone/rubbish has been shipped instead of scrap metal or goods of bad quality or wrong specifications have been shipped. In the worst case, the documents have been paid but no goods are shipped.

The risks to the exporter and/or the importer can be minimised or eliminated if they know each other’s trading abilities and there is a degree of trust between them.

The political/economic stability in the exporter’s and importer’s countries and there is no restriction or likely restriction on the movement of goods and money are factors that should be put into consideration by the exporter as well as importer. In this respect, the exporter should note that he may face the risks of being unable to obtain payment if he trades with the importers in countries whose political/economic situations are unstable or which are being suffered trade embargo or U.S sanction.

Hoping this may help you.

Best regards,
Mr. Old Man (Nguyen Huu Duc) …