Discrepancy can be defined as an error or defect, according to the issuing bank, in the presented documents compared with the documentary credit, the UCP 600 rules or other documents that have been presented under the same letter of credit.
Discrepancy fee occurs, only when the issuing bank determines that the presentation is not complying.
Issuing banks try to justify discrepancy fee, based on their claim that discrepant documents increase handling costs of issuing banks.
Many trade professionals find these claims unjustified.
Later on this post, you can find the history of the discrepancy fee and how it evolved since its introduction to trade finance word.
But, first of all, I need to explain the usage of the discrepancy fee in letters of credit.
How to Determine, How Much You Have to Pay Due to a Discrepancy Fee, If You Make a Non-Complying Presentation:
Issuing banks must insert discrepancy fee clauses to letters of credit, otherwise they can not demand such fees from beneficiaries.
For this reason, at the first stage, you have to determine, whether or not the letter of credit contains a discrepancy fee clause.
In order to that, you must look at Field 47-A : Additional Conditions.
Discrepancy fee clauses vary from one letter of credit to another in terms of wording. But their structure remains similar. After reading couple of examples, you will be familiarized with them.
Examples of Discrepancy Fees:
- Discrepancy Fee Format 1: Any set of documents containing discrepancies and presented to us under this documentary credit, will be charged with a fee of USD 50.00 plus telex charge (if any) at final payment. This charge is for account of beneficiary and will be deducted from any proceeds to be paid.
- Discrepancy Fee Format 2: Discrepancy fee for USD 75.- (or equivalent in l/c currency) plus all relative swift/tlx charges will be deducted from documents value for each presentation of discrepant documents under this credit, notwithstanding any instructions to the contrary.
- Discrepancy Fee Format 3: If documents are presented with discrepancies and accepted by applicant a fee at the rate of USD 225.
History of the Discrepancy Fees
“As I recall, it all began sometime in the mid-1980s, when banks in US began charging a discrepancy fee – usually about US$25. Over the last decade, this practice spread through the documentary credit world so much that now practically most banks, including some large international banks, engage in this practice. A senior trade finance department manager says: “Now more than 60% of the credits impose discrepancy fees and these credits come from all over the world.” writes Abdul Latiff Abdul Rahim in his article which was published in year 1997 at DCInsight. We have reached 2014 and now almost every letter of credit issued with very little exception contains a discrepancy fee.
Discrepancy fees applied to vast majority of the letters of credit because banks can increase their letter of credit commissions significantly with these kinds of charges.
“Nonetheless, there is a worrying trend whereby more and more items and with higher rates of banking charges are being deducted by banks in the course of L/C transactions. Some of these charges include: opening charges, amendment fees, advising fees, negotiation fees, confirmation fees, transferring fees, reimbursing fees, payment commissions, telex/SWIFT commissions, courier charges, document checking fees, handling charges, discrepancy fees, and commission in lieu of exchange and so on.” Wang Shanlun states in his article published in 2010 at DCInsight.
Unless exporters and importers object these high banking charges in letter of credit transactions, we should expect to see the trend keep going which results higher and higher L/C fees that will be imposing by the banks.
Who Should Pay Discrepancy Fees?
Discrepancy fees are collected from the beneficiaries.