Combating risks in import trade

Letter of credit, often abbreviated as LC, has by and large become a familiar term among the business community.  However, to use a popular cliché, there is more in a 'letter of credit' than meets the eye. Inadequate awareness about the complexity of letters of credit and failure to identify the potential risks may turn your sweet dream of good days ahead into a nightmare. This piece underlines some of the unique features of letters of credit and the potential sources of risks to assist the importers, particularly newcomers in the import business, to safely navigate through its rough terrains.
Simply stated, an LC is a guarantee of payment from a bank, on behalf of the importer, to the exporter or supplier who would be supplying goods and services to the bank's named customer. LC incorporates a safety valve for the importer in the form of a stipulation that the payment to the exporter will be given, or a usance bill accepted, only after the documents of title to the goods are presented to the negotiating bank as evidence of shipment of stated merchandise. This assurance, however, is only as good as it looks. Because, the LC does not guarantee that the documents produced by the exporter are genuine or the merchandise has been actually shipped.
The operation of letters of credit at the international level is governed by what is known as 'Uniform Customs and Practice for Documentary Credits (UCPDC)' issued by the Paris based International Chamber of Commerce (ICC). The UCPDC, last revised in 2007, is considered as Bible, so to say, that deals with every aspect of a letter of credit. One of its article says that the 'Banks deal with documents and not with goods, services or performance to which the documents may relate'. The authors of the UCPDC must have recognised that the banks cannot run around  to ascertain their authenticity from the agencies or entities that issued documents like bill of lading, insurance certificates etc.
What this ' bank does not deal with goods' means is that a fraudster, masquerading as exporter, may  produce forged documents to the overseas negotiating bank without actually making a shipment or simply packing rubbish in the export consignment. After collecting the payment he would waste no time to vanish into thin air to enjoy his booty in a luxury resort, may be in Rio. It is just not a hypothetical probability but an unfortunate reality for numerous victims in every country including Bangladesh.
With all these high tech gadgets now available in the market, false documents can be generated with relative ease for presentation to the negotiating bank for payment. On the other hand, the bank does not or cannot apply seriously to establish authenticity of numerous documents they handle every day. The UCPDC requires the banks only to ensure that the documents should be seen to be prima facie in order and descriptions of the cargo and other particulars recorded in them are not inconsistent with each other.
Another important feature of the UCPDC is that an LC is considered as 'a separate transaction from the sale or other contracts on the basis of which it may be issued'. Even though a reference to this contract is included in the credit, the bank is in no way concerned with or bound by such contract. On the other hand, the UCPDC asks the issuing bank to discourage any attempt by the applicant of the credit (the importer) to include the underlying contract, proforma invoice and the like, as an integral part of the credit.
What this means is that every small detail in the sale contract cannot be included in the LC. If you do, the bank may very well ignore that. Banks in the western countries, especially in the USA, are averse to LCs loaded with excessive details. What you can do is to include only those elements of the contracts like general description of the merchandise, port of loading or unloading, last date of shipment, documents that need to be presented to the negotiating bank to claim payment or acceptance of time bill.
These aspects of the letters of credit should alert you to the perceived risks of importing against LC. It is not that problems will crop up every now and then but even if it does in a long while in respect of a big order, the resultant loss may deal a fatal blow to your business. Some years ago, a large number of Bangladesh importers had opened letters of credits for import of chemicals from a supposedly German supplier. The documents were received in time, the banks paid out the invoice value to the so-called supplier through the negotiating banks but the consignments never reached Bangladesh. The documents including the all important bills of lading were forged.
In your search for remedies against these risks, you need to focus your attention on finding out how genuine the supplier is. Your past satisfactory dealings with a trusted supplier should give you a sense of his credibility.
An enquiry with your bank and the business people you know about past dealings, if any, with an exporter would be another source of comfort. It is also quite common for the banks to collect information about foreign suppliers through their correspondents abroad but these could be rather perfunctory.
When a deal involves purchase of merchandise worth a million or so dollar, the recommended option is to ask your bank to get a report from a reputable credit rating agency like Dunn & Bradstreet or Standard & Poor. It is a bit expensive but as they say, one should not try to be wise about a small penny and foolish about a pound.
How would you ensure that the goods dispatched against an LC are what you ordered for? There are instances of rubbish, in lieu of the ordered goods, sent by fly-by-night suppliers. Typically, containers are loaded with sand, rocks or rubble and bills of lading, made out on a "said to contain" basis, will specify the goods that the unfortunate seller expects to receive. By the time you or your clearing agents detect it when the consignment reaches Bangladesh port, the so called supplier will have gone with the money from the negotiating bank. The latter will realise the money from your bank who will in turn debit your account. So, at the end of the day, to use another cliché, you are the one who would count the losses.
To avoid these types of frauds, apart from the credit reports on the supplier, you may engage a reputable pre-shipment inspection agency to inspect the consignment and require their report, along with other documents, to be presented by the supplier to the negotiating bank.
 After your bank has opened the LC and dispatched it to the advising bank en route to the exporter abroad you may, as an afterthought, want to cancel or amend it. The UCPDC says that 'a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary'.
In order to avoid the hassles for amending a credit, it would be wise to precisely assess what kind of material or services you need and how you want it to be shipped.  The LC the LC should be opened only after you two have reached the consensus with the overseas supplier. Otherwise, you will probably run from proverbial pillar to post to get the amendment and incur further costs as fees and commissions of the banks at home and abroad.
The writer is a former Executive Director of Bangladesh Bank. [email protected]