In international trade, a Letter of Credit (LC) operates on one simple principle: banks deal in documents, not goods.
That means payment under an LC depends entirely on whether the exporter presents documents comply strictly with the LC’s terms and the rules set out under UCP 600 , the Uniform Customs and Practice for Documentary Credits published by the International Chamber of Commerce (ICC).
Understanding how banks examine LC documents can help exporters and importers avoid costly delays, discrepancies, and disputes.
The Role of Banks in a Letter of Credit
There are usually several banks involved in an LC transaction, each with a clearly defined role:
- Issuing Bank: The buyer’s bank, which issues the LC and undertakes to pay the seller once compliant documents are presented.
- Advising Bank: The seller’s bank, which authenticates and forwards the LC to the exporter.
- Confirming Bank (if applicable): A second bank adds its own guarantee of payment, providing extra security to the exporter.
- Negotiating or Presenting Bank: The bank receives the exporter’s documents for examination and payment.
Each of these banks follows a structured, rule-based process when examining documents.
Examination Standards Under UCP 600
UCP 600 Articles 14-17 outline how banks must handle and review documents under an LC. Some key points include:
- Five Banking Days Rule (Article 14b):
Banks have a maximum of five banking days from the day of presentation to determine whether the documents comply or contain discrepancies. - Examination Based on Documents Only (Article 14a):
Banks do not verify whether the goods have been shipped or whether the services have been performed , they only check the documents. - Consistency Across Documents:
Information in one document must not conflict with in another. For instance, the quantity, description, and shipment dates must match exactly. - Original vs. Copy (Article 17):
Banks check whether documents presented are originals or copies as required under the LC terms. - Strict Compliance:
Even minor errors , spelling mistakes, missing signatures, or incorrect dates , can result in a discrepancy, which may delay or block payment.
Typical Documents Examined
A bank may review a range of documents, including:
- Commercial Invoice
- Transport Documents (e.g. Bill of Lading, Air Waybill)
- Insurance Certificate or Policy
- Packing List
- Certificate of Origin
- Inspection or Quality Certificates
Each document must exactly reflect the details stated in the LC , including descriptions, dates, weights, values, and consignee information.
The SWIFT MT700 and Electronic Transmission
Letters of Credit move securely between banks using the SWIFT network , typically via MT700 messages (and related formats such as MT707 for amendments).
These structured electronic messages ensure all LC details , from amounts and shipment dates to required documents , are clearly and consistently communicated between the issuing and advising banks.
This standardisation greatly reduces errors and helps ensure banks around the world apply the UCP 600 rules in a uniform way.
What Happens If There’s a Discrepancy?
If a bank finds a discrepancy during document examination, it will:
- Notify the presenter within five banking days.
- Specify the exact discrepancies identified.
- Await the applicant’s (buyer’s) instructions , to accept or reject the documents.
If the buyer accepts the discrepancies, payment may still proceed. if not, the documents are returned to the exporter.
This process follows by UCP 600 Article 16, which makes sure transparency and clear communication between all parties.
Tips for Exporters
To minimise the risk of discrepancies and ensure prompt payment:
- Check the LC immediately on receipt and request amendments if terms are unclear or impractical.
- Align every document with the LC’s wording , even small deviations can trigger a rejection.
- Use document checklists and experienced freight forwarders.
- Present documents early to allow time for correction if needed.
Final Thoughts
Banks play a critical role in safeguarding both parties in a Letter of Credit transaction. Their examination process , governed by UCP 600 and supported by SWIFT MT700 communication standards , makes sure consistency, fairness, and clarity in global trade.
For exporters and importers alike, understanding how banks review LC documents isn’t technical knowledge , it’s a key part of managing trade risk and ensuring timely, secure payment.
