Asian Letters of Credit

L/C Monitor, Volume 5, Issue 1, January/February 2003

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The names of the parties, as well as the data and information in the cases stated below, have been sanitized in order to protect the identity of the parties involved. The complexities of the cases have also been simplified to facilitate easy understanding of the key issues involved.
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In 1999 LCM featured a Special Report on China in which T.O. Lee, T.O. Lee Consultants Ltd., gave an in-depth overview of the problems with letters of credit issued by Chinese financial institutions. Since 1999 many things have changed in China and in Asia regarding letters of credit. LCM spoke with T.O. Lee about the most recent events.
LCM: What are the most important changes or developments in Asia with letters of credit since 1999?
T.O. Lee: To save cost, banks no longer provide L/C document checkers in each of their branches as they did in the good old days. As a result, checkers in some very busy branches may be overworked. They may miss some discrepancies due to haste, and worse still, they may not be able to meet the three-day safe harbour 'reasonable time' requirements in sending out refusal notices. At the same time, checkers in some branches may have few documents to check and are idle and bored. But a bank cannot predict or control the inflow of L/C presentations. So banks in Asia group all these checkers together and place them in one document-handling centre. In Hong Kong, for example, one centre is in Hong Kong Island, one in Kowloon Peninsula, and one in the New Territories. This can lower headcounts and may also achieve savings in the training budget as much fewer checkers need to be trained.
The U.S. banks, particularly the big ones, pioneered the 're-engineering' process on letter of credit operations by replacing expensive L/C super professionals with a computerized system. This is done to save costs and increase operation efficiency, particularly as the L/C market is shrinking year by year, especially in North America, for many reasons that will not be discussed here as they are not relevant to the main topic of this interview. As the pie is getting smaller, U.S. banks have to do something to adapt to the new environment. It is unfortunate to see so many super pros in L/C, some of them my friends, being forced to retire early and join me as consultants in order to keep afloat. As a result, I have warned some of my banker friends in the Middle East and Asia to build their lifeboats before it is too late if you don't adapt fast enough in this high-tech world where everything changes so rapidly, the changes will soon swallow you.
So this "U.S. banking practice" is now coming to Asia. However, due to Asian culture, the changes are not so drastic as in the United States. Even so, in the Far East, branches of U.S. banks are moving forward rapidly because of orders from U.S. headquarters. When I phoned a banker working in an Asian branch of an U.S. bank at end of 2002, she told me that she had to work 24 hours non-stop in order to finish an 'unreasonable' deadline. She also told me that she did not dare apply for overtime pay, because many colleagues had already been laid off.
Nevertheless, due to rapid and drastic changes in American bank branches in the Far East, non-American banks also feel the pressure and have to follow suit. So the 're-engineering' process is now sweeping through Asia. The CEO of one of the biggest Chinese banks in Hong Kong told the press that for the last thirty years or so, not a single staff member had been fired. But that was in the good old days. Now, to make the East meet the West, if a staff member were caught doing something wrong for a second time, the staff member would have to leave the bank. This has also been a necessary step since China joined the WTO. Banks in China have to protect their market share, which is now under keen competition from foreign banks since the doors of China are now open to competitors from the West.
As Asia is facing serious economic downturn, most banks do not get enough L/C business to make the department profitable. So everybody has to work harder. 'Add Value' in personal development is a beautiful jargon promoted by the senior management. But the staff members take it to mean 'doing more work with fewer people, for even less pay.'
With the advent of the computerised system, fewer staffs were needed and, as a result, many experienced bankers lost their jobs, senior and junior alike. Part of this has been due to the duplication of staff members after a merger or in joint venture projects. In Malaysia, for example, about sixty banks were to be merged into less than fifteen banks, by government order. That means the banks could not enjoy the freedom to choose their own partners.
Some banks are having to find new ways to generate enough revenue to keep them afloat. So now some banks in Asia are attempting to do the documentation for the customers, which is a service traditionally provided by the freight forwarders.
On the other side, an exporter might ask the bank manager to look after its shipping department in order to reduce discrepancies and save money on L/C training. Those bankers who feel insecure in their jobs may approach their customers proactively for a position and look for a safe harbour.
Another change that follows the fast development of e-commerce is that a lot of in-house works may be outsourced to another bank or IT service provider. This is again necessary to keep the fees competitive and to keep the business profitable. If a bank is to keep the IT operations within the bank itself, it has to spend a lot of money each year to upgrade and update the fast changing software and hardware, to train the IT core staffs, and to innovate services, but at the same time, the bank has to keep the fees down in order to compete. So this is a money-losing business if done solely by oneself. Whether the bank staff likes it or not outsourcing may be the only way to survive in a particular line of business.
For customers of the bank, it also means that a third party may be able to access very sensitive information and data that the customers are comfortable only with the banks handling. As outsourcing is still in the beginning stages, it is too early to tell what ill effects might emerge. Would the IT contractor sell the information to a third party such as a credit card company? If the client's business is very profitable, would the IT contractor move into the same business?
Talking about eUCP, the whole world is still taking a 'wait and see' attitude, probably due to a lack of security or of a feeling of mental comfort in e-commerce laws, precedent cases, softwares, and 'ISeBP' ('International Standard electronic Banking Practice').
I remember that when the eUCP was first introduced, some aggressive L/C experts predicted that within the next five years the L/C operation would be fully electronic. Now we know this is not the case. And from my knowledge of Asian culture, the paper L/C may not disappear for at least ten years. I feel quite safe in saying this because it will take at least three or four years to draft the 'UCP X00' (updated version of UCP 500) and another couple of years to become familiarised with it. When the computer was introduced, people predicted that we would use less paper. But now everybody knows that we have used no less paper since the advent of the computers. The only exception is email. Although like many people who grew up in the paper world do, I still tend to print out email hard copies and file them for peace of mind.
LCM: What is the range of problems negotiating banks or confirming banks face when dealing with Asian issuing banks today?
T.O. Lee: I don't think there are any regional differences here. So what I will comment on is not confined to Asia. It is global. Most of the Asian L/Cs are available with payment by drafts drawn on either the issuing bank or, in some cases, on the applicant, despite sub Article 9 (a) (iv) of UCP 500. Some unscrupulous bankers in certain countries might help their beneficiaries to squeeze payments from the issuing banks by declaring themselves as innocent holders in good faith after negotiating the drafts. These negotiating banks are protected by the Bills of Exchange Act 1882. The issuing banks from Asia have no defence. Hence in order to avoid this type of risk, I often warn them in my workshops not to make the L/C available by negotiation and particularly not by open negotiation. But one of my banker clients told me that she had no choice because the power applicant told her bank to make the L/C available for open negotiation or he would move out. And that banker has had sleepless nights ever since. So even if one knows there is a landmine ahead, one still has to cross the minefield anyway. That is life.
Talking about the confirmation of an L/C, I also noted that an unwise beneficiary in Thailand would ask the advising bank (which was also the accepting bank) to add its confirmation to the L/C. This is a great gift to the advising/accepting bank. If the documents were compliant, the accepting bank would not refuse to accept the drafts, although it has no obligation to do so under sub Article 10 (c) of the UCP 500. So there is no need to buy the confirmation. And the confirming bank receives a confirmation commission without bearing any additional risk. Once the drafts are accepted, the payment obligation on maturity is automatically without recourse, even if there is no confirmation. Under such a circumstance, confirmation is just a waste of money. One banker from Taiwan told me that this is the regular income stream for his bank. He loved getting paid for taking on no extra risks or obligations.
In Hong Kong, some smart beneficiaries I met in L/C workshops would ask the advising/nominating bank to make a written undertaking to negotiate to save the confirmation commission and yet have almost the same protection. Beneficiaries are becoming more aware due to open L/C workshops now easily available in the marketplace. One of my clients, the finance controller of NEC Hong Kong, got his CDCS title. As a result, there are more disputes among the bankers and the beneficiaries.
LCM: What traps do exporters need to be aware of when dealing with Asian letters of credit?
T.O. Lee: This is again a global issue. An L/C issued from any country may have tricks and traps, the so-called soft clauses. One example is where an L/C from China calls for an inspection certificate either issued or countersigned by the applicant. Another example is that of an L/C from Bangladesh calling for partial shipments, but phrased in such a sophisticated way as to trigger on instalment shipments penalty under Article 41. This is really a work of art, if there is such an art form.
Article 41 reads: INSTALMENT SHIPMENTS/DRAWINGS: If drawings and/or shipments by instalments within given periods are stipulated in the Credit and any installment is not drawn and/or shipped within the period allowed for that instalment, the Credit ceases to be available for that and any subsequent instalments, unless otherwise stipulated in the Credit.
Some L/Cs give unclear instructions, which may be due to negligence. But when disputes arise, the banks may use such grey areas to trigger a dishonour. To give an example, I saw an L/C from India that called for presentation of the usual documents, bill of lading, insurance certificate, and so on, but specified no shipment period or deadline. That was to advise separately by an amendment at a later date. This L/C in fact would be inoperative until the issuing bank sent out an amendment to set a shipment period or deadline. If the amendment never came, the irrevocable L/C would actually be working like a revocable L/C. When I asked the client why he accepted such an L/C, he told me frankly that he did not realize the risk until it surfaced. 'Even if I knew about it early I could not do anything about it as at that time, it was the buyer's market,' he added. So avoiding such problems is easier said than done.
LCM: Since the famous Original Case, has the standard banking practice changed?
T.O. Lee: I presume you mean the famous 'Glencore' case from the UK. After the publishing of the ICC Decision Paper on Original Documents, the Glencore case was to have no effect in Asia, as Asia is not under UK jurisdiction. However, in my consultancy work, I did see a four-page L/C from India stating that the ICC Decision Paper is not applicable and requiring that all stipulated documents be marked 'ORIGINAL.' In some Asian countries, such as India, Pakistan, and Bangladesh, the average length of an L/C is four pages. Some of the requirements are in fact a repetition of the UCP 500 Articles. The number of certificates required may be six to eight or more.
LCM: Is there such thing as Asian Standard Banking Practice?
T.O. Lee: Yes and no. When an L/C is subject to UCP 500, it is automatically subject to 'international standard banking practice as reflected in the Articles of UCP 500' - as articulated in sub Article 13 (a) of UCP 500. In fact an L/C subject to UCP 500 is by itself also subject to international standard banking practice. Having said that, I do realize that some procedures and documentation may be affected by local culture, and that UCP 500 does allow some headroom for local culture and local values, but not to the extent that L/Cs can be inconsistent with international standard banking practice. For example in Muslim banking, interest is not allowed and a different concept and name are used in lieu of 'interest.'
In another example, the famous Hong Kong L/C case Hing Yip Hing Fat Co., Ltd. -v- Daiwa Bank, Hong Kong, Kaplan J. considered that the reasonable time was affected by the fact that English was not a mother tongue of the Chinese document checkers.
LCM: Can you give examples of the two most interesting cases your consulting firm has handled in the last four years?
T.O. Lee: During the past four years, I handled many typical L/C dispute cases that were both popular and similar. To give you one example, an issuing bank approached me and asked if it could reject the claim for reimbursement from a negotiating bank that claimed to have negotiated the drafts and documents in good faith. However, the bills of lading were fraudulent. On the face of it, it seemed that I could do nothing about it since the negotiating bank was protected by the Bills of Exchange Act 1882 as a holder in due course. But then I found some indication of fraud on the bills of lading as well as inconsistencies with other documents, which the document checkers in the negotiating bank should have noted if they had used reasonable care and common sense in examination of the documents. Reasonable care is a condition that takes precedent to the rights of a holder in due course or in good faith. After seeing my expert's report, the negotiating bank would either withdraw its claim for reimbursements or agree to bear the losses together with the issuing bank, depending on the strengths of these negligences and the nature of the inconsistencies.
I remember one L/C dispute case in Toronto that was not resolved with the UCP 500. Instead Incoterms 2000 provided the solution. An EXW L/C specified handling of shipment by a named freight forwarder with details such as address and telephone number stipulated in the L/C. For one reason or another, the beneficiary could not get this named freight forwarder to receive the goods, which were high tech computer chips. So the beneficiary used another freight forwarder to arrange air shipment. The issuing bank considered the Air Waybill signed by a third party freight forwarder discrepant and dishonoured payment. The beneficiary sued the issuing bank. As an expert witness, I had to explain to the Toronto Court why the named freight forwarder should be used and why violation would constitute a valid discrepancy. My reasons came from the rights and obligations between the seller and the buyer under the EXW term in Incoterms 2000. The Judge took my view and gave judgement in favour of the issuing bank. Full details of this interesting case are now available in my L/C website www.tolee.com.
LCM: What should banks and corporates do when faced with an L/C problem?
T.O. Lee: Before I answer this question, let me explain the background to this issue first.

Since the profit margin from the bills department is merely a fraction of one per cent, the bills department is not considered a main revenue earner or profit centre of a bank. Many problems stem from this attitude. The bank does not spend money so easily and readily on the bills department as it does on other main revenue earners such as credit cards, trustee, asset management, mortgage, insurance, or securities.
As a result, there is not a large enough budget for training. I have witnessed that for a two-day workshop, a bank may send in four staff members, each attending a half-day only. After completion of the workshop, they would share their handouts and exchange individual learning with the rest.
When they have disputes with other banks or their customers, the senior managers require them to consult the in-house lawyers first, failing which, the legal retainers outside. The trouble with lawyers is that they may tend to be conservative and react like a Dr. No. They may recommend that the bank not take good care of the goods, as this may be interpreted as a self-admission of its own faults or obligations. So the goods are eventually lost, because no one is taking care of them by doing things such as extending insurance, arranging proper storage, and inspecting from time to time.

So my recommendations to banks are:

Put more emphasis on the bills department. Even if it does not make millions, it may easily lose millions.
Provide a reasonable budget for training to avoid those million-dollar mistakes. Investment in training is very cost-effective.
In the case of a dispute, look for a competent L/C expert first before approaching the lawyers. If necessary, have the expert introduce a good lawyer or barrister who has a proven track record in his or her proficiency with L/C litigations.
Bankers need to armour themselves with non-banking knowledge, such as an understanding of the basic concepts in air, maritime, surface, and multimodal transport, chartering, cargo insurance, Incoterms 2000, commercial laws, and dispute resolutions. This may help in determining discrepancies more confidently, precisely, and correctly.
Instead of treating customers to luxurious dinners, they should use that money to hire an expert who will provide free workshops to their customers. The same message from a third party can appear to be more neutral, believable, and reliable to their customers. An expert can effectively change the bad habits of some applicants, such as giving excessive details on the L/C application form, giving an instruction in the form of non-documentary condition, abusing Incoterms 2000, being inconsistent, and the like.
Some law firms provide free L/C opinions in order to get more business in mortgages, trustees, or other legal service requirements from other departments of the same bank. I have seen some of these free legal opinions, which are either stereotypical, superficial and thus without any depth or breadth, or which show that the lawyers have not done their homework. What more can one expect when it is for free! When a banker shops for consultancy or expert-opinion service, it is better not to shop on price alone. When you pay peanuts you get monkeys. The expert's fee is normally less than 2 per cent of the amount in dispute. So as a famous Hong Kong saying goes: 'Don't try to save a candy and lose a factory!'

Mr. T. O. Lee FAE, MCIArb, MITD is a consultant, expert witness, trainer, and arbitrator specialized in resolving international trade disputes involving letters of credit, bills of lading, charter parties, Incoterms 2000, trade frauds, and China trade. He represents Canada in various ICC Commissions, such as Banking, Commercial Trade Practice, Electronic Commerce, Mediation, and Arbitration. He was appointed by ICC Paris in 2003 as a Member of the UCP 500 Revision (UCP 600) Consulting Group and is rated as one of the nine best letter of credit specialists in the world in a recent global survey by L/C Views of USA. He is a member of the United Nations International Multimodal Transport Association, Geneva; Accredited Arbitrator of the International Center for Letter of Credit Arbitration, USA; a Fellow and an Accredited Expert (Letter of Credit) of the Academy of Experts, Gray's Inn, England; and a columnist in ICC Documentary Credit Insight (1994-1999); 'Maritime Asia/Intermodal Asia' by Lloyd's of London Press, and 'Hong Kong Economic Journal.' He works closely with the ICC Commercial Crime Bureau on commercial frauds involving bills of lading, air waybills, and letters of credit. He also provides training for the carriers, freight forwarders, bankers, traders, insurers, and lawyers on these subjects. Articles on bills of lading, letters of credit, CDCS exercises, highlights of dispute cases resolved, and training programmes can be found in his website http://www.tolee.com..

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