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Navigating Non-Compliant Demands: A Guide to Corrections Under Demand Guarantees

Demand guarantees are crucial instruments in international trade, providing security and assurance to beneficiaries. However, the intricacies of these instruments can sometimes lead to discrepancies and non-compliant demands, causing delays and potential disputes. Fortunately, the International Standard Demand Guarantee Practice (ISDGP) provides clear guidelines on how to rectify such situations. Understanding Non-Compliance A demand is deemed non-compliant when it fails to adhere to the specific terms and conditions outlined in the guarantee. This could range from simple errors in documentation to more substantial deviations from the agreed requirements. When a guarantor identifies a non-compliant demand, they must reject it, triggering a process for potential correction. The Beneficiary's Right to Correct Crucially, the ISDGP acknowledges the beneficiary's right to rectify non-compliance. Even if the guarantee explicitly excludes Article 17(b), the beneficiary is still permit...
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A Practical Guide to Advising Letters of Credit for Banking Professionals

 1. Definition of Letter of Credit

  • A Letter of Credit (LC) is a financial instrument issued by a bank (the Issuing Bank) on behalf of a buyer (the Applicant) to a seller (the Beneficiary).
  • It guarantees payment to the seller upon presentation of stipulated documents to the Issuing Bank or a nominated bank, provided these documents strictly comply with the terms and conditions outlined in the LC.

2. Key Players

  • Issuing Bank: The bank that issues the LC on behalf of the buyer.
  • Applicant (Buyer): The party requesting the issuance of the LC.
  • Beneficiary (Seller): The party receiving the payment under the LC.
  • Advising Bank: A bank requested by the Issuing Bank to inform the Beneficiary about the terms and conditions of the LC.

3. Advising Letter of Credit

  • An Advising Bank transmits the LC to the Beneficiary upon verifying the apparent authenticity of the letter of credit.
  • Advising Bank signifies that the advice accurately reflects the terms and conditions of the letter of credit or amendment received from Issuing Bank. 

4. Responsibilities of the Advising Bank

  • Authenticity Checks:
    • Verify the authenticity of the LC and any amendments.
    • SWIFT MT 700 messages are typically considered automatically authenticated.
  • Workability Assessment:
    • While not obligated to examine the LC for workability, most banks will review it for obvious errors.
    • Warn the Beneficiary and/or contact the Issuing Bank about potential issues.
    • Ultimately, the responsibility for the workability of the LC rests with the Beneficiary.
  • Compliance and Regulation:
    • Comply with all applicable regulatory requirements, including sanctions screening, Anti-Money Laundering (AML), Combating the Financing of Terrorism (CFT), and Weapons of Mass Destruction (WMD) proliferation checks.
    • Scrutinize the LC, amendments, and all associated documents for compliance.
  • Confirmation (Optional):
    • If requested and willing, the Advising Bank confirms the LC and adds its own undertaking to pay.
    • If unwilling to confirm or advise, the Advising Bank must promptly inform the Issuing Bank.

5. Practical Considerations for Advising Banks

  • Country Risk Assessment: Evaluate the creditworthiness of the Issuing Bank and the political and economic stability of the country of origin.
  • Know Your Customer (KYC) Procedures: Apply KYC principles to understand the nature of the underlying trade and mitigate potential risks.
  • Fraud Prevention: Implement robust anti-fraud measures to detect and prevent fraudulent transactions.
  • Communication and Coordination: Maintain clear and timely communication with the Issuing Bank and the Beneficiary.
  • Stay Updated: Keep abreast of evolving regulations, best practices, and industry standards related to LC transactions.

6. Benefits of Utilizing Letters of Credit

  • Reduced Risk for Sellers: Provides a secure payment mechanism, mitigating the risk of non-payment by the buyer.
  • Enhanced Buyer Confidence: Assures sellers of timely payment, facilitating smoother trade transactions.
  • Improved Cash Flow: Enables sellers to access funds more quickly, improving their cash flow management.
  • Standardized Procedures: Offers a standardized framework for international trade transactions, reducing uncertainties.

By incorporating these additional points, the information provides a more comprehensive and practical overview of Letter of Credit practices.

Disclaimer: This information is for general guidance only and does not constitute legal or financial advice.






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