SBLC risks to be considered by Beneficiary

SBLC is an independent undertaking, the issuer of the SBLC has its own obligation to pay the beneficiary on receipt of a document made by, or on behalf of the beneficiary, which comply with the terms and conditions of the SBLC. Standby letters of credit is “irrevocable” meaning that it cannot be changed or cancelled prior to its stated expiry date without the agreement of all parties. The beneficiary should consider the following when deciding to accept SBLC.

A beneficiary must determine its credit rating of the issuer. Where an issuer’s credit rating, size or country risks are unacceptable to the beneficiary, a beneficiary may require an acceptable confirming bank.
Fraud risk: There is a possibility of fraudulent SBLCs being issued by unauthorized parties or fake banks. Beneficiaries should thoroughly verify the authenticity and credibility of the issuing bank before accepting an SBLC.
Beneficiary should ensure that SBLC wording complies with the requirements of the underlying contract e.g. (i) Can a beneficiary legally make the required statements and are all reasons they can make a demand for payment properly addressed? (ii) Does the SBLC expire with sufficient time to complete the underlying contract? (iii) Can the beneficiary obtain all required drawing document.
Reviewing terms and conditions will help to assure success if the beneficiary makes a drawing against the SBLC, understanding that when a presentation does not comply with a SBLC’s stated terms/conditions, an issuer is not obligated to pay.
The SBLC should be made subject to its preferred international rules such as ISP98 versus UCP600 as the rules align everyone involved with a SBLC and may also assist in the case of a legal matter.
Confirmation and/or advising costs may be due by the beneficiary.

It is important for beneficiaries to carefully evaluate these risks and take appropriate measures such as conducting due diligence on involved parties, seeking legal advice, and ensuring compliance with all terms and conditions specified in the SBLC to mitigate potential risks.

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