Letter of credit
A letter of credit (English letter of credit , abbreviated L / C , even bankers letter of credit ) is an abstract and conditional promise to pay by a credit institution on presentation referred to in the letter of credit documents and fulfillment of other specified in the letter of credit conditions to those specified in the letter of credit beneficiaries to the To pay the amount of money specified in the letter of credit or to accept a bill of exchange drawn on it.
The word has its origin in the power to act ( French accréditation ), which in turn is based on trust ( Latin accreditivus ). Those involved in the letter of credit are a seller (usually an exporter ), a buyer (usually an importer ) and at least the credit institution issuing the credit.
As a trade term , the letter of credit is a payment condition that the seller (mostly exporter) sets for the buyer (mostly importer). The mutual fulfillment risks are evenly distributed through the letter of credit , because the seller only loses his power of disposal over the goods (if appropriate documents, e.g. traditional papers have been agreed ) at the point in time at which payment of the purchase price is ensured. Conversely, the buyer only loses his power of disposal over the amount of money when he has power of disposal over the goods (if appropriate documents have been agreed, e.g. traditional papers).
The letter of credit is issued by the buyer (usually the importer) a bank job to ask the seller (usually exporter) against delivery of the letter of credit documents mentioned a certain amount of money available. Specifically, it is an agency contract in the form of a service contract , which obliges the bank to act according to the instructions of the client. This is concluded between the client and its issuing bank, the (mostly exporter) or one of its the seller correspondent banks or the Bank of the exporter, the letter of credit announced . This advice is the announcement of the opening of the letter of credit. With the confirmed letter of credit, another bank involved (usually in the buyer's country) gives an additional (analogue) abstract and conditional promise to pay on behalf of the bank issuing the credit. The advantage for the buyer (if an importer) is, in addition to having a second bank as obliged, that he has a claim against a bank against which he can take legal action in his own country. Political risks such as the moratorium are thereby excluded.
The letter of credit is not regulated by law, but is codified in the “Uniform guidelines and usages for documentary letters of credit” (UCP 600 of July 2007). The legal nature of the ERA 600 is controversial, but the Federal Court of Justice classifies it as a commercial practice . Art. 2 UCP 600 defines the letter of credit as an “agreement according to which a payment to a third party ... or another bank for execution or on the instructions of a customer or a bank acting in its own interest against prescribed documents has to be made authorized to accept and pay for such bills of exchange , provided the conditions of the credit are met ”. The possible goods documents are finally listed in Art. 19–28 UCP 600 and must be checked by the crediting bank for completeness and correctness (Art. 14 UCP 600). As the mention in Art. 2 ERA 600 shows, alternating with the letter of credit in connection can be brought, so that a view of banking Negoziierungskredit present. In addition to the ERA 600, the International Standard Banking Practice (ISBP) also exists as an interpretation aid from the ICC for the banks involved in the processing of the letter of credit. In the ISBP, individual problems that were not finally clarified in the UCP 600 are dealt with. However, the ISBP regulations are not legally binding for the banks involved. In the event of any disputes, a party involved can also call the ICC Paris directly for their opinion; these opinions are documented in the ICC's collective decisions.
If the bank promises to pay the exporter from the letter of credit, according to German law there is an independent ("abstract") promise of debt in accordance with German Civil Code , which comes about through tacit acceptance by the exporter ( German Civil Code) and does not require a written form ( HGB ). The independent, abstract promise of payment made by the credit institution to the beneficiary is an essential feature of the documentary credit and is abstract both from the basic transaction (mostly export) and from the letter of credit agreements , so that the importer's defenses do not affect the promise of debt.
The documentary credit is to be distinguished from a simple agency agreement within the meaning of Section 675 BGB. Such is the case, for example, if the client instructs a credit institution to make a payment for motor vehicles only if the contractor hands over vehicle documents , vehicle registration documents and gate passes for vehicles to be delivered to the credit institution for review.
The following types of letters of credit are available:
- According to the type and due date of the benefit
- Payment credit:
- Sichtakkreditiv ( english sight letter of credit ): The payment will be made upon presentation of documents
- deferred payment letter of credit : Payment is made on a specific date after the documents have been presented.
- Akzeptierungsakkreditiv ( English letter of credit against acceptance ): Payment against Hergabe a Wechselakzeptes across the board,
- Negotiation credit ( English negotiable letter of credit ): Payment on credit.
- Payment credit:
- According to the type of obligation (Art. 6b UCP 600):
- revocable letter of credit ( English revocable letter of credit ): Debt promise with resolution condition according to which the issuing bank may at any time change their promises to pay to the acceptance of the documents by the Akkreditivstelle or cancel Article 8 UCP 600,.. It does not provide sufficient security for the seller, so that it practically does not occur in practice.
irrevocable letter of credit ( English irrevocable letter of credit ): abstract and conditional 9a ERA promise to pay a bank for payment under Article 600th.
- unconfirmed letter of credit ( English non-confirmed letter of credit )
- confirmed letter of credit ( English confirmed letter of credit ): The confirming bank is an additional (analog) abstract and conditional payment promise to the recipient in the credit. It is usually agreed that this only has to be paid if the buyer's bank does not purchase the equivalent value within a waiting period (often 10-30 bank working days ).
- According to the nature of the conditions :
- Cash credit ( letter of credit ): Payment is made upon presentation of the letter of credit.
- Documentary credit or goods letter of credit ( English documentary credit ): The payment is bound to the submission of the documents mentioned in the letter of credit and the fulfillment of the other mentioned conditions.
Notes on individual types of letters of credit
- Confirmed letter of credit
The opening of a letter of credit establishes an irrevocable promise to pay by the buyer's bank (usually the importer). In order to give the seller (mostly exporter) additional security in addition to this promise to pay, it is possible that, in addition to the promise to pay by the buyer's bank (mostly importer), a promise to pay is made by the seller's bank (mostly exporter) or another bank involved . This second promise to pay serves to hedge against risks in the importer's bank ( country and / or bank risks) and in the importer's country (e.g. risk of a payment moratorium or the risk of a conversion and transfer stop risk, which the crediting bank does not is allowed to exchange (convert) local currency or to transfer foreign currency abroad) can be justified. A letter of credit confirmation requires that the buyer's bank (usually the importer) expressly issues a confirmation order in the letter of credit. The confirming bank is liable to the seller (usually the exporter) if the opening bank fails to comply with the letter of credit. In the confirmation clause, the confirming bank generally reserves a waiting period after which it pays instead of the opening bank.
A confirmation without an order from the foreign bank is a confirmation of purchase or a silent confirmation in banking language . In both cases, the confirming bank reviews the issuing bank's creditworthiness and records a contingent liability for that bank on its books.
Banks usually only confirm letters of credit for which they also check the documents in a binding manner for the bank issuing the credit. After determining that the documents are in conformity with the letter of credit, the confirming / receiving bank notifies the issuing bank that the documents have been accepted and asks them to provide sufficient funds within three bank working days or that they are in the L / C opening recovers or that it debits the Loro account of the opening bank.
- Transferable letter of credit
When conducting commercial transactions , so-called retail chains are regularly created. The importer of a product is often not the end consumer or the wholesaler or retailer of a product, but only an intermediary. So use z. For example, companies often use middlemen to buy goods for which they do not have sufficient market information in the relevant markets .
If these middlemen do not have enough liquidity or credit lines of their own to process the purchase using a letter of credit, the instrument of a letter of credit transfer is often chosen to enable the middleman to process the purchase.
The process is as follows: The end customer opens a letter of credit in favor of the intermediary. This credit expressly states that it can be transferred. This transfer note can also be restricted. The transfer can be restricted to a specific supplier or a specific country, and specific suppliers, countries etc. can also be excluded. The intermediary's bank receives an order from the intermediary to transfer the letter of credit (or part of the letter of credit in the case of divisible letters of credit) to a specific supplier. According to UCP 600 , with three exceptions, the original conditions of the letter of credit are transferred 1: 1 to the second beneficiary. The exceptions are the price (as a rule, the middleman purchases at a lower price than he bills the end customer), the delivery dates and the duration of the letter of credit, which can be shortened. Since the intermediary's bank does not assume an independent payment obligation here, but only passes on the payment obligation of the opening bank, it does not have to encumber the intermediary's credit line. Part of the transfer is the obligation of the opening bank to also accept "documents from third parties". The transferring bank is always also the paying agent for the letter of credit, i.e. it checks that the documents submitted are correct for the other two banks involved. When the exporter presents the documents, the transferring bank checks the documents and receives an exchange invoice from the intermediary in order to be able to use the letter of credit of the opening bank. When it records the incoming payment from the opening bank on the account of the intermediary, it forwards the proceeds to the account at his bank for the exporter.
In theory, it is also possible to transfer a letter of credit several times. However, this is extremely rare in banking practice because of the complexity of such a construction.
Another instrument for processing the purchase for a middleman, which can be derived from the letter of credit without using his own liquidity or credit line, is the postponement of an irrevocable payment order by his bank.
- Revolving letter of credit
The term revolving letter of credit appears regularly in the literature on letters of credit. This means a letter of credit that is revived after it has been used and can be used again by the exporter. A distinction is made between two basic forms of this letter of credit:
- the simple revolving letter of credit
- the cumulative revolving letter of credit
In the case of a revolving letter of credit, the issuing bank would commit itself to the exporter to accept proper documents up to a value of X within a certain period of time (e.g. one month). After the end of the calendar month, the exporter could again submit documents under the letter of credit in the following month until either the total amount specified in the letter of credit has been reached or the letter of credit becomes invalid due to the expiry of the deadline. With the cumulative revolving letter of credit, the exporter could also use the letters of credit in the following periods that were not used in the previous periods; with the single revolving letter of credit, the unused amounts expire.
In practice, this form of credit has no meaning. Since with a revolving letter of credit, the issuing bank would burden the importer's credit line in the amount of the maximum calculated cumulative utilization over the entire credit period (and would have to collect corresponding credit commissions), this type of processing is generally not of interest to importers.
For the processing of regularly occurring deliveries, the importer usually assigns a long-term payment guarantee in favor of the exporter to the importer's house bank.
- Forbearance letter of credit
In contrast to the sight letter of credit (payment takes place when documents conforming to the letter of credit are submitted), the importer is given a payment term "deferred payment L / C".
Note in the letter of credit: "available ... 90 days after sight", "available ... 90 days after B / L-date" or similar. In East Asia, this type of letter of credit is also often called "usance L / C". This is no longer used, however, and the western variant is used for standardization.
Payment process by means of a documentary letter of credit
- The importer of goods (letter of credit) instructs his house bank to open a letter of credit in favor of the exporter (beneficiary) under his or her counter liability. This assumes that the importer has a corresponding credit line or credit at the house bank .
- The importer's bank irrevocably opens the letter of credit in favor of the exporter. To do this, it uses a bank in the exporter's country (= advising bank) that has either been specified by the importer or is its correspondent bank. The letter of credit describes the goods in terms of type, quantity and packaging, and deadlines for shipping the goods from the place of loading to the place of unloading and for presenting the documents. The documents that trigger the payment of the letter of credit are also specified.
This can include the following shipping documents :
- Commercial invoice , rarely in a certified consular form ( English commercial invoice )
- Freight invoice ( English freight invoice )
- Packing List ( English list packing )
- Certificate of origin , usually certified by the Chamber of Commerce in the country of origin ( English certificate of origin )
- Loading papers or transport documents
- Insurance certificates or policies for transportation risks
- Bills of exchange for refinancing for leniency letters
- Quality certificates
- Certificates from shipping companies or goods testing companies, e.g. B. the pre-shipment inspection certificate
Furthermore, the issuing bank undertakes irrevocably to the exporter to make payment to him when he has fully met the documentary conditions of the letter of credit.
- The exporter's bank notifies the exporter of the opening of the letter of credit after checking whether the letter of credit is legally and formally correct. It is also a good idea to take over the documentary processing for the exporter.
- After the notification has been issued, the exporter checks whether the letter of credit corresponds to the sales contract. He then loads the goods at the place of dispatch (port, airport, train, truck, etc.) and receives the relevant documents, which he then submits to his bank along with the other documents required in the letter of credit.
- After carefully checking the documents and determining that they are in conformity with the letter of credit, either the payment is made to the exporter (if the advising bank was assigned the function of paying agent when the letter of credit was opened) or it is forwarded to the issuing bank. After determining that the documents are correct, the latter then makes the payment and hands the documents over to the importer.
- The importer can acquire ownership of the goods with the transport documents if the right to the goods is evidenced by the accompanying documents. This is the case, for example, with bills of lading.
If the documents do not fully meet the conditions of the letter of credit, the irrevocable promise to pay by the issuing bank has become invalid. As a rule, the exporter's bank determines this when examining the documents. In general, incorrect documents are sent on to the importer's bank on a "collection basis". This then clarifies with the importer whether he is still willing to accept the documents and have the amount of the credit transferred. Since the importer's bank's payment obligation no longer applies in the event of inconsistencies in the documents, it can also make a new decision as to whether it wants to make the payment. Should the importer e.g. B. has become insolvent in the meantime, it could refuse to pay. In this case, after discovering the discrepancies, the opening bank must inform the exporter (via the presenting bank) that it refuses to accept the documents. According to the "ERA 600", this must be done within a maximum of five banking days after receipt of the documents. If she misses this deadline, the incorrect documents are deemed to have been recorded and thus to be paid for.
Economic importance for the exporter
- Advantage for the exporter
He has an abstract and absolute promise to pay from a bank with which he can enforce payment for the goods after delivery, regardless of the interests of the importer.
- Disadvantages for the exporter
- If, in the case of an unconfirmed letter of credit, the issuing bank becomes insolvent or the government of the country of the importer imposes a payment moratorium, the exporter is no longer protected by the letter of credit (letter of protection).
- In addition, there is the document risk, i.e. the question of whether the exporter is able to produce documents that fully meet the conditions of the letter of credit. The payment claim against the bank is void if the documents are incorrect (e.g. because delivery dates have been exceeded and therefore the conditions of the letter of credit are not met or because the documents contain typographical errors or the documents do not meet the requirements for the content of letters of credit) . In the event of faulty documents, processing as a letter of credit becomes processing as document collection .
Economic importance for the importer
- Advantages for the importer
Payment is only made
- if documents that conform to the credit are submitted on time,
- by submitting the documents required in the importing country and / or
- with documentary evidence of timely dispatch of goods.
- Risk to the importer
If the goods delivered do not correspond to the contract and the letter of credit, but the documents are in accordance with the letter of credit, the exporter will still be paid. In individual cases, the solution for this can be e.g. B. the goods inspection by a goods testing company, which confirms with a corresponding certificate (which was also required as a document to be enclosed with the opening of the letter of credit) that the goods meet the contractual conditions. In practice, however, this is rarely used for reasons of cost and is mainly used when importing higher-value goods, usually basic materials.
Economic importance for the bank
By definition, credit institutions must be involved in letters of credit. In addition to the transactions typical of a letter of credit , there are also international transfers in foreign payment transactions . Around 15% of foreign trade in Germany is secured by letters of credit.
From the bank's point of view, the opening of a letter of credit entails a contingent liability on the part of the letter of credit towards the exporter, as it undertakes to redeem proper documents as part of a promise of debt. Therefore, according to Art. 166 Para. 8b of the Capital Adequacy Ordinance (CRR), a risk position value of 20% of the credit amount applies to both participating institutions when backing with equity capital . The equity burden of letters of credit classified as medium / low credit risk is - in addition to the monitoring and processing effort - the reason why banks charge commissions for this (opening, notification, confirmation and document acceptance commission ). Letters of credit represent a loan and are therefore a banking transaction in accordance with (1) No. 8 of the German Banking Act (KWG), because the promise of debt is an “other guarantee”. Regardless of the revocable or irrevocable letter of credit, it is to be shown "below the line" in the bank balance sheet under section U1b "Liabilities from guarantees and warranty contracts" in accordance with (2 ) of the Financial Institutions Accounting Ordinance (RechKredV) .
Variants of fraud
In fraudulent circles, forged letters of credit with the English designation Letter of Credit are variously offered to investors at extremely low market rates for pre-financing . The exhibitor is a supposed “Prime Bank”. The fraudsters proceed with a high degree of professionalism - starting with a good forgery of the letterhead to cleanly copied signatures of actually authorized exhibitors . Almost without exception, letters of credit are sent - unsolicited - by fax, as a forged signature is very difficult to identify as such. These are mostly letters of credit for which no goods documents are usually required and which are issued for presentation in countries with foreign exchange control .
In the diplomatic context of credit means (also Kreditiv ) the credentials that the government of the sending State for the accreditation of a diplomatic issues for submission to the Government of the receiving State.
- Isabella Brunotte, Klaus Vorpeil: The documentary credit . Deutscher Sparkassen Verlag, Stuttgart 2007, order no. 310 470 00
- Jörn Altmann (Author), Christoph Graf von Bernstorff (Editor): Securing payments in foreign trade: Using letters of credit tactically to ensure success . Bundesanzeiger Verlag, 2007, ISBN 978-3-89817-575-3 .
- Hans Claas Bernhardt: The use of the documentary credit , Dike Verlag AG, Zurich / St. Gallen 2012 (Diss. University of Bern 2011), ISBN 978-3-03751-416-0 .
- The 10 most important facts about letters of credit
- Transport Information Service: Letter of Credit (L / C)
- BGH WM 1958, 456, 459
- Art. 18: commercial invoice , Art. 19: Transport document at least two different types of transport, Art. 20: Seekonnossement , Art. 21: Seefrachtbrief , Art. 22: Charter game -Konnossement, Art. 23: air waybill , Art. 24: Documents relating to road, rail or inland waterway transport, Art. 25: Courier confirmation of receipt, postal receipt / mailing receipt or proof of postage, Art. 28: Insurance documents
- BGH, judgment of September 26, 1989 - Az .: XI ZR 159/88
- Julia Haas: promise of guilt and acknowledgment of guilt . 2011, p. 164 f.
- BGHZ 60, 262, 264
- BGH, judgment of September 26, 1989 - Az .: XI ZR 159/88
- Wolfgang Grill, Ludwig Gramlich, Roland Eller (eds.): Bank, stock exchange, financing . In: Gabler Bank Lexikon , Volume 1, 1995, p. 458
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- Georg v. Alten (Ed.), Handbook for Army and Fleet , Volume 5, German publishing house Bong & Co., Berlin 1913, p. 595