Discrepancies : Biggest trouble for everyone in lc business

Almost all of the ICC opinions issued so far are related to complaints about "alleged discrepancies". What we can see from the results of the ICC opinions is that ICC Banking Committee does not agree with banks in most cases.

Definition : or lack of definition :

How can we define a discrepancy in a letter of credit transaction. Seriously is there any reference to the definition of a discrepancy in the letter of credit rules? Is it too simple to be forgotten? Or too complicated to define?  What is the definition of a discrepancy according the UCP 600 rules?     

Inconsistency in Application :

Discrepancies can change from country to country, bank to bank, document checker to document checker. Let me give you a real life example here. Couple of years ago we have presented documents to the confirming bank under a set of letters of credit consists of 10-15 pcs of independent letters of credit. All of these small amount independent letters of credit have the same text and having the same conditions. Description of goods, port of loading, port of discharge, additional conditions all were the same. Just latest date of shipment and expiry date were changing form one lc to another. First 3 presentations found to be complying by the confirming bank. But on the 4th document set we received a swift message "MT 734 Advice of a Refusal" indicating a discrepancy on the certificate of origin. Lessons learned. Discrepancies can change from country to country, bank to bank, document checker to document checker and presentation to presentation. 

and here is the results :

According to ICC Trade Finance Surveys on average %70 of letter of credit presentations found to be discrepant on first presentation. This is a very frustrating result. Everyone in letter of credit business should understand huge negative effects of such a high volume of discrepant presentations.

Why banks find too much discrepancies on the documents :
  • Letter of credit rules are often find to be very complicated and hard to understand by exporters and importers.
  • Most of the small and medium scale export and import companies do not have enough resources to hire a letter of credit specialist in their organizations.
  • Exporters and importers do give enough respect to letter of credit rules and standard banking practices. exporters and importers think that they can handle letters of credit with ease on their way. but the fact is different. Letters of credit have very strict rules to follow.
  • Exporters do not allocate enough time to understand the letter of credit text before starting to production and shipment. 
  • Banks open over detailed letters of credit. Sometimes we see that banks demand almost impossible conditions from the beneficiaries on their letters of credit texts.
  • Banks issue foggy (not clear) letters of credit.
  • Banks examine documents too strictly.
What can be done to prevent discrepant presentations :
         Pre - Document Preparation Stage :
  • Please keep in mind that whatever you do to prevent a possible discrepant presentation, it is highly likely that you will be facing a discrepancy one of the documents you have submitted. So it would be very wise for you to keep your relations close with your customer.
  • Before entering a letter of credit transaction you need to learn the letter of credit rules very well. You should buy one original copy of current letter of credit rule book, UCP 600. Please follow this link how to find a copy of UCP 600 online.
  • Before entering a letter of credit transaction you also need to be familiarized with the International Standard Banking Practices. In order to do that you should buy one original copy of current International Standard Banking Practices book. Please follow this link to learn more about International Standard Banking Practices.
  • You should starting to study letter of credit text as early as you can. As one of the letter of credit guru indicated "you can not solve lc problems at the presentation stage." The earlier you start to work on the letter of credit text the better it would be.
  • Demand a letter of credit draft from your buyer before having the original letter of credit issued. Work on this letter of credit draft carefully.
  • Check required documents field one by one. Make sure that you can supply all the required documents as requested by the letter of credit.
  • Check additional conditions field one by one. Make sure that conditions stated in this field is not going to create any problem for you on the presentation stage.  
  • If you find a condition or clause that you can not comply with get in touch with your buyer to amend the letter of credit.
  • If you can not understand a condition or sentence on the letter of credit text then you should get in touch with the issuing bank for clarification.
         Document Preparation Stage :
  • Complete the documents as requested by the credit. Make sure that you also take into account the letter of credit rules and international standard banking practices when preparing the documents.
  • Make sure that signatures, authentication are made by requested persons or institutions.
  • Make sure that you will be presented all required documents without any absence.
  • Make sure that you presented correct number of originals and copies as requested by the credit.
  • Make sure that the dates on the documents are in accordance with the dates mentioned on the credit. For example you would not be making either a late shipment or a late presentation.
  • Make sure that you will collect all requested documents by credit as soon as you make the shipment. Once you collect all documents you need to make the presentation without losing time.
         After Presentation Stage :
    Follow the situation of the documents day by day with the advising bank. Give necessary information to your buyer. And stay in alert mode until you received your payment.

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What does discrepancy mean in a letter of credit payment? How can discrepancy be defined under a letter of credit transaction? 
Perhaps discrepancies is one of the most complicated and "blurred" field in all letters of credit terminology. One bank finds multiple discrepancies on a document yet the same document found to be complying by another bank. But how?

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