Inspection Certificate in Letters of Credit Transactions
Definition and Usage :
I have explained couple of times so far on this website that letter of credit transaction follows the documents not the actual goods or services in circulation. Which means that banks reach payment or non-payment decision under a letter of credit only by controling the documents presented by the beneficiary. Banks have no connection with the actual goods or the services.
Above explanation left importers into a serious source of fraud risk such as non-delivery, goods received with inferior quality etc... Pre-shipment inspection, also called preshipment inspection or PSI, is a part of supply chain management and an important and reliable quality control method for checking goods' quality while clients buy from the suppliers. Place of inspection can be set either in the country of origin (at the time of loading) or in the country of destination (at the time of unloading or at the warehouses where the imported goods are received).
Types of Inspection Certificates :
The certificates delivered by inspection companies are basically of two different types:
Clean Report of Findings (CRF) : This is a document required by the importing (sometimes, exporting) country, as some developing countries have a large part or all of their imports (exports) inspected prior to shipment in the country of origin, as to quantity, quality and price (Pre-Shipment Inspection - PSI). These PSI schemes, entrusted to international inspection agencies, have been established by the authorities for custom, fiscal or foreign exchange control purposes and are compulsory.
Commercial Certificate of Inspection : Stating the quantity and quality ( any measurable quality parameter requested by the principals). These Certificates are issued by an inspection agency acting as a neutral third party assessing the actual condition of a traded cargo between a seller and a buyer. A commercial certificate of inspection is necessary to build up a long-term relation between buyers and sellers. Bad quality of goods traded can lead to loss of market share in the long run.
Benefits of Inspection Certificates :
Main objective of the inspection certificate is to satisfy the importer or the government body that the goods are in conformity with the indicated specifications on the sales contract or proforma invoice.
Inspections are important tools to reduce trade risks and avoid fraud.
Shipment of low quality goods prevented.
Non-delivery fraud with fake bill of lading or any other transport document prevented.
Another risk of fraud is that the cargo is changed after inspection: the cargo inspected did not go into the ship. This can be prevented by adding a numeretical link on the inspection certificate to the transport document. For example inspection certificate that must indicate the container number can prevent such a fraudelent action.
How to demand an effective inspection certificate in a letter of credit transaction?
Add at least one original copy of an inspection certificate to field 46-A Documents Required as one of the necessary documents under the letter of credit.
Make sure that inspection certificate is issued by one of the well known inspection companies around the world. The most well known inspection companies are : SGS, Bivac/Bureau Veritas, Cotecna, Intertek.
Clearly indicate on the letter of credit text that inspection certificate is complying with the specifications indicated on the sales contract or proforma invoice.
Make sure that values indicated on the inspection certificate does not conflict with the values indicated on the letter of credit or other documents.
Do not forget to add a numeretical link on the inspection certificate to the transport document.
What is inspection certificate? How can we use an inspection certificate in a letter of credit transaction?
Pre-shipment inspection, also called preshipment inspection or PSI, is a part of supply chain management and an important and reliable quality control method for checking goods' quality while clients buy from the suppliers.