Compliance

URR 725 Article 6: Issuance and Receipt of Reimbursement Authorization or Reimbursement Amendment – CDCS Guide

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“Article 6. Issuance and Receipt of a Reimbursement Authorization or Reimbursement Amendment”

Explanation: Article 6 of the URR 725 outlines the specific requirements and responsibilities for the issuance and receipt of reimbursement authorizations or amendments. This article ensures that all parties involved in a reimbursement process adhere to a standardized set of rules, minimizing the risk of miscommunication or errors.

“Clause a: All reimbursement authorizations and reimbursement amendments must be issued in the form of an authenticated teletransmission or a signed letter. When a credit or amendment thereto which has an effect on the reimbursement authorization is issued by teletransmission, the issuing bank should advise its reimbursement authorization or reimbursement amendment to the reimbursing bank by authenticated teletransmission. The teletransmission will be deemed the operative reimbursement authorization or reimbursement amendment, and any subsequent mail confirmation shall be disregarded.”

Explanation: This clause mandates that reimbursement authorizations and amendments must be communicated through an authenticated teletransmission or a signed letter. The authenticity of the transmission is crucial for ensuring the validity of the authorization. If the credit or its amendment is sent via teletransmission, the issuing bank must inform the reimbursing bank using the same method. The teletransmission is considered the official document, and any mailed confirmation is irrelevant.

Example: An issuing bank in India sends a reimbursement authorization to a reimbursing bank in Germany via SWIFT (an authenticated teletransmission). Later, the issuing bank sends a physical mail confirmation of the same authorization. According to this clause, the SWIFT message is the operative authorization, and the mailed document should be disregarded by the reimbursing bank.

“Clause b: An issuing bank must not send to a reimbursing bank: i. a copy of the credit or any part thereof, or a copy of an amendment to the credit in place of, or in addition to, the reimbursement authorization or reimbursement amendment. If such copies are received by the reimbursing bank they shall be disregarded; ii. multiple reimbursement authorizations under one teletransmission or letter, unless expressly agreed to by the reimbursing bank.”

Explanation: This clause prohibits the issuing bank from sending copies of the credit or its amendments instead of, or along with, the reimbursement authorization. If the reimbursing bank receives such copies, they must be ignored. Additionally, the issuing bank cannot include multiple reimbursement authorizations in one transmission or letter unless the reimbursing bank has explicitly agreed to it.

Example: Suppose an issuing bank mistakenly sends a copy of a letter of credit along with the reimbursement authorization. The reimbursing bank should ignore the letter of credit copy and only act upon the reimbursement authorization. Additionally, if the issuing bank includes multiple authorizations in a single SWIFT message without prior agreement, the reimbursing bank is not obligated to process them.

“Clause c: An issuing bank shall not require a certificate of compliance with the terms and conditions of the credit in the reimbursement authorization.”

Explanation: The issuing bank is prohibited from requiring a certificate of compliance with the credit’s terms and conditions as part of the reimbursement authorization. The focus is on the reimbursement process, not on verifying compliance with the credit terms.

Example: An issuing bank cannot demand that the reimbursing bank confirm compliance with the letter of credit terms before processing a reimbursement. The reimbursing bank’s role is limited to handling the reimbursement as per the authorization.

“Clause d: A reimbursement authorization must (in addition to the requirement of Article 1 for incorporation of reference to these rules) state the following: i. credit number; ii. currency and amount; iii. additional amounts payable and tolerance, if any; iv. claiming Bank or, in the case of a credit available with any bank, that claims can be made by any bank. In the absence of any such indication, the reimbursing bank is authorized to pay any claiming bank; v. parties responsible for charges (claiming bank’s and reimbursing bank’s charges) in accordance with Article 16 of these rules. A reimbursement amendment must state only the relative changes to the above and the credit number.”

Explanation: The reimbursement authorization must include specific details such as the credit number, currency, amount, any additional payable amounts, the claiming bank, and the parties responsible for charges. If any of these details change, a reimbursement amendment should reflect only the changes along with the credit number.

Example: If a reimbursement authorization is issued for a letter of credit with the number LC12345 for $100,000, the authorization must specify the credit number, amount, and the bank that will claim the reimbursement. If the amount changes to $120,000, a reimbursement amendment must be issued stating this change and referencing LC12345.

“Clause e: If the reimbursing bank is requested to accept and pay a time draft, the reimbursement authorization must indicate the following, in addition to the information specified in (d) above: i. tenor of draft to be drawn; ii. drawer; iii. party responsible for acceptance and discount charges, if any. A reimbursement amendment must state the relative changes to the above. An issuing bank should not require a sight draft to be drawn on the reimbursing bank.”

Explanation: When a reimbursing bank is asked to accept and pay a time draft, the reimbursement authorization must also include the tenor of the draft, the drawer, and the party responsible for acceptance and discount charges. If these details change, a reimbursement amendment must reflect the changes. The issuing bank should avoid requiring a sight draft to be drawn on the reimbursing bank.

Example: If the reimbursement authorization includes a time draft with a 90-day tenor, drawn by a specific bank, the authorization must specify these details. If the tenor is extended to 120 days, a reimbursement amendment must be issued indicating this change.

“Clause f: Any requirement for: i. pre-notification of a reimbursement claim to the issuing bank must be included in the credit and not in the reimbursement authorization; ii. pre-debit notification to the issuing bank must be indicated in the credit.”

Explanation: Any requirement for pre-notification of a reimbursement claim or pre-debit notification to the issuing bank must be included in the credit itself, not in the reimbursement authorization.

Example: If an issuing bank wants to be notified before a reimbursement claim is made, this requirement must be stated in the letter of credit. It should not be added later in the reimbursement authorization.

“Clause g: If the reimbursing bank is not prepared to act for any reason whatsoever under the reimbursement authorization or reimbursement amendment, it must so inform the issuing bank without delay.”

Explanation: If a reimbursing bank cannot or is unwilling to act under the reimbursement authorization or amendment for any reason, it must promptly notify the issuing bank.

Example: If a reimbursing bank finds that the reimbursement authorization contains errors or it has other concerns, it must immediately inform the issuing bank rather than proceeding with the reimbursement.

“Clause h: In addition to the provisions of Articles 3 and 4, the reimbursing bank is not responsible for the consequences resulting from non-reimbursement or delay in reimbursement of reimbursement claims when any provision contained in this article is not followed by the issuing bank or claiming Bank.”

Explanation: The reimbursing bank is not liable for any consequences arising from non-reimbursement or delays if the issuing or claiming bank fails to comply with the provisions of this article.

Example: If the issuing bank fails to follow the procedures outlined in Article 6, leading to delays in reimbursement, the reimbursing bank cannot be held responsible for the resulting issues.

UCP600 Article 7 Explanation – CDCS Guide: Issuing Bank Undertaking

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UCP600 Article 7 Explained

Clause (a)

Clause:
“Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by:
i. sight payment, deferred payment, or acceptance with the issuing bank;
ii. sight payment with a nominated bank and that nominated bank does not pay;
iii. deferred payment with a nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
iv. acceptance with a nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
v. negotiation with a nominated bank and that nominated bank does not negotiate.”

Explanation:
This clause outlines the issuing bank’s obligation to honour a letter of credit when the beneficiary presents complying documents. If the credit is available by various methods (e.g., sight payment, deferred payment, acceptance, or negotiation), the issuing bank must honour the credit under the following circumstances:

  • If the credit is available with the issuing bank itself by sight payment, deferred payment, or acceptance.
  • If the credit is available with a nominated bank but that bank fails to pay, incur a deferred payment undertaking, accept a draft, or negotiate.

In simpler terms, the issuing bank guarantees payment to the beneficiary even if the nominated bank fails to perform its duties under the letter of credit.

Example:
A company in India sells goods to a buyer in the USA under a letter of credit issued by an Indian bank. The Indian bank (issuing bank) allows the credit to be available by negotiation with a U.S. bank (nominated bank). If the U.S. bank fails to negotiate the documents (i.e., doesn’t purchase or discount the draft), the Indian bank must still honour the payment to the beneficiary in India, provided the documents comply with the credit terms.

Clause (b)

Clause:
“An issuing bank is irrevocably bound to honour as of the time it issues the credit.”

Explanation:
Once the issuing bank issues a letter of credit, it is irrevocably bound to honour the credit as long as the beneficiary presents compliant documents. This means that the issuing bank cannot revoke or cancel its obligation once the credit is issued.

Example:
If an issuing bank in Japan issues a letter of credit on behalf of a buyer in Japan for goods purchased from a supplier in China, the bank cannot withdraw its commitment once the letter of credit is issued. As long as the Chinese supplier presents the required documents as per the credit terms, the Japanese bank must honour the payment.

Clause (c)

Clause:
“An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary.”

Explanation:
This clause states that if a nominated bank honours or negotiates a complying presentation and sends the documents to the issuing bank, the issuing bank must reimburse the nominated bank. If the credit is available by acceptance or deferred payment, the issuing bank must pay the nominated bank at maturity, regardless of whether the nominated bank prepaid or purchased the documents before maturity. The issuing bank’s obligation to reimburse the nominated bank is independent of its obligation to pay the beneficiary.

Example:
Suppose a French bank (issuing bank) issues a letter of credit available by deferred payment with a German bank (nominated bank). The German bank honours a complying presentation and forwards the documents to the French bank. The French bank must reimburse the German bank at maturity, even if the German bank had advanced payment to the beneficiary before the maturity date. This reimbursement obligation is separate from the French bank’s obligation to the beneficiary under the credit.