International trade is no longer only for the big corporate giants. As the global economy continues to evolve, an increasing number of small, family run businesses are beginning to do business in the international market place. One of the most crucial details of trading, particularly in the international area, is effecting payment. Letters of credit have been the preferred method of payment in international trade transactions for centuriessince their inception in 1645. It is likely that they will continue to be needed for the foreseeable future. The purpose of this research is to provide information regarding the pros and cons as well as the risk when it comes to using letters of credit.
FOREIGN TRADE UNIVERSITY ENGLISH FOR SPECIFIC PURPOSES ADVANTAGES, DISADVANTAGES AND THE RISKS OF PAYMENTS MADE BY DOCUMENTARY LETTER OF CREDIT Group 18 Ta Thu Trang Nguyen Trang Linh Duong Thuy Linh Ngo Thi Cam Tu Nguyen Thi Dung : 1411110655 : 1411110374 : 1411110398 : 1411110672 : 1411110117 Instructor: Mrs Phan Kim Thoa Hanoi, March 2017 Contents Abstract Introduction Background I Procedure involved in a letter of credit cycle .7 Parties to a letter of credit .7 Procedure involves in a letter of credit II Advantages and disadvantages of payments made by Letter of Credit 10 To the Importer: 10 To the exporter: 11 III Risks analysis 14 Exporters’ risks .14 Importer’s risks 18 Conclustions and future study .23 References 24 Abstract International trade is no longer only for the big corporate giants As the global economy continues to evolve, an increasing number of small, family run businesses are beginning to business in the international market place One of the most crucial details of trading, particularly in the international area, is effecting payment Letters of credit have been the preferred method of payment in international trade transactions for centuries-since their inception in 1645 It is likely that they will continue to be needed for the foreseeable future The purpose of this research is to provide information regarding the pros and cons as well as the risk when it comes to using letters of credit Introduction As the payment instrument, letter of credit has become widely used in international trade Letter of credit is even described as” the life-blood of international commerce” Letter of credit takes care of the interests of both the exporter and importer, so it is considered to be the most effective and safest method to secure the payment in international trade transaction However, each letters of credit party still bears some amount of risk in the real practice The problem will be discussed under three chapters: Procedure involved in a letter of credit cycle; the advantages and disadvantages of using letter of credit to the exporter and to the importer and risks analysis Chapter will focus on providing some basic knowledge about the commonly used international payment method- letter of credit Chapter also gives a detailed description of steps involved in using a letter of credit Chapter discusses the advantages and disadvantages of payment made by documentary letter of credit A letter of credit enjoys various advantages by being highly customizable and reducing credit risks but also brings some disadvantages with additional cost to international trade transactions Chapter focuses on analyzing the risks The main parties, which involve in the process of letters of credit, are exporter, importer, and banks The same as any payment pattern, all of these parties bear different risks These risks are going to be analyzed based on the two principles of credit The research paper will also give some real cases to dive deeper into the risks analysis Background The readers who know this background can skip this section Letter of Credit (L/C) Importer Exporter Issueing Bank Advising Bank Applicant Beneficiary Flexible clauses Free on Board (FOB) 10 Cost & Freight (CFR) 11 “All risks” term A documentary letter from a bank that allows people to get a particular amount of money from another bank A person, company, etc that buys goods from another country in order to sell them in their own country A person, company or country that sells goods to another country The bank which prepares the credit in accordance with the applicant’s instructions and issues it addressed to the beneficiary The bank selected by the issuing bank to authenticate the credit and advice it to the beneficiary The importer (buyer) who submits an application for the opening of a credit and who stipulates its term and documentary requirements The exporter (seller) to whom the credit is addressed and to whom the issuing bank gives its irrevocable undertaking The clauses that can control the beneficiary, and can be revocable in any time They can damage the benefit of exporter a lot and exporter should try to avoid these clauses One of the incoterms of international trade FOB is ‘free on board’ (…named port of shipment).’free on board’ means that the exporter fulfills his obligation to deliver when the goods have passed over the ship’s rail ant the named port of shipment This means that the importer has to bear all costs and risks of loss of or damage to the goods from that point The FOB term requires the seller to clear the goods for export This term can only be used for sea or inland waterway transport Also one of the incoterms of international trade CFR is ‘cost and freight’ (…named port of destination).’cost and freight’ means that the exporter must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the exporter to the importer when the goods pass the ship’s rail in the port of shipment The CFR term requires the seller to clear the goods for export This term can only be used for sea and inland waterway transport The term stands for a relatively broad form of insurance It 12 A bill of lading (BL) covers property damage and, depending on the wording, the business interruption loss caused by property damage, irrespective of its cause The scope of cover is defined by the exclusions, these being indispensable in order to guarantee the risks’ insurability Thrsten Steinmann, ‘exposure (property & engineering)’, issue NO.8, February, 2002 Those risks related to two (or more) belligerents engaging in hostilities, whether or not there has been a formal declaration of war Such risks are excluded by the F.C & S.(free of capture and seizure) warranty, but may be covered by a separate war risk policy, at an additional premium A document which is issued by the transportation carrier to the shipper acknowledging that they have received the shipment of goods and that they have been placed on board a particular vessel which is bound for a particular destination and states the terms in which these goods received are to be carried I Procedure involved in a letter of credit cycle A letters of credit is a financial instrument issued by a bank or other intermediary which guarantees payment to a third party, the bank is referred to as the issuer The bank’s customer is referred to as the account party and the third’s party is the beneficiary In effect, the letters of credit substitutes the bank’s credit for its customer’s credit so that the risk to the seller is virtually eliminated The seller draws either sight or time drafts against the letter upon presenting the bank with appropriate documents indicating compliance with the letter’s stipulated requirements The bank is repaid the purchase price plus interest and fees when the buyer pays or takes out a loan which is often secured by the goods being purchased From a legal standpoint, a letter of credit has legal life that is entirely independent of the transaction between the account party and the beneficiary it supports According to this independence principle, the bank’s obligation to pay under the credit is conditioned only upon the presentation of the proper documents and not upon whether the account party is satisfied with the transaction Actually, there are three separate contracts involved with each transaction First, there is the contract between the account party and the beneficiary Secondly, there is a contract between the account party and the bank Finally, a contract exits between the bank and the beneficiary Parties to a letter of credit Applicant Issuing bank Advising bank Beneficiary Procedure involves in a letter of credit After signing the contract, it is up to the buyer to take the first step by applying to their bank ( the bank referred to as the issuing bank in terms of payment) to issue the agreed L/C The issuing bank must progress a formal credit approval of the application and check that local permissions, import licences or currency approvals, if needed, have been granted When all formalities and procedures have been dealt with, the L/C is issued as stipulated in the terms of payment, and forwarded to the selected advising bank Upon arrival of the L/C from the issuing bank- by letter, fax or mostly nowadays as a SWIFT message- the advising bank will assess its contents and determine where it should be made payable If the advising bank is instructed to add its confirmation, this involves a separate credit decision in this bank, after which the seller is notified of the L/C and its details, including information about where it is to be honoured for payment acceptance or deferred payment, and whether it has been confirmed by the advising bank At this point, it is vital that the seller checks the terms of the L/C against the agreed terms of payment to make sure that all the details and instructions can be met a later stage when the documents are to be produced and delivered If not, the seller must immediately communicate directly with the buyer so that the necessary amendments are made and confirmed to the seller through the banks Only then does the seller have the security on which the whole transaction is based After shipment, the seller receives the transport documents and prepares the other documents required Checks are also made to ensure that they conform to the terms of the L/C, but equally important, that the contents of the documents presented are consistent between themselves The documents are then forwarded to the advising bank, which checks their conformity with the terms of the L/C The seller is contacted about any discrepancies Discrepancies that cannot be corrected at this late stage, for example wrong shipping details or late presentation, will be subject to later approval by the buyer, and any payment made by the advising bank will then be with recourse, subject to this approval The issuing bank will also check the documents and the buyer has to consider any discrepancies When approved, or if the documents are compliant, the buyer has to pay If not approved, the documents will be held at the disposal of the advising bank, pending any new negotiation between the buyer and the seller of the terms for such an approval, or ultimately returned to the advising bank and the seller against repayment of any earlier payment made with recourse to the seller The documents are released to the buyer against payment at sight or at any date as stipulated in the L/C Contract Applicant Beneficiary Payment Documents Advising bank Issuing bank Issue Application Payment Documents Payments Documents Advising II Advantages and disadvantages of payments made by Documentary Letter of Credit A letter of credit enjoys various advantages by being highly customizable and reducing credit risks but also brings some disadvantages with additional cost to international trade transactions To the Importer: a Advantages: Time-saving: The buyer can control the time period for shipping of the goods He can also minimize time, as bank acts on behalf of him The terms of a letter of credit can specify that fax presentments are allowed and that the draw must be honored (or notice of dishonor given) within a few days or less Unlike other shipments, a shipment under Letter of credit is treated with most care to meet delivery schedule and other required parameters by the exporter The documents receive by buyer promptly and quickly with complete sets Unless meeting delivery schedule and prompt documentation, the supplier does not get his payment from opening bank This is one of the major advantages of LC for an importer is concerned Security: Normally, the supplier prefers LC than other transactions as this method reduces the risk to the importer, due to various reasons The first point to mention is that while accepting a LC, the supplier guarantees to meet the terms and conditions of letter of credit with documentary proof This assurance provides security to buyer for future business plan Since buyer is the holder of Letter of credit, bank acts on behalf of buyer Opening bank remits amount only after satisfaction of all terms and conditions of letter of credit with documentary proof This arrangement protects importer from losing money This is an advantage for the buyer on fulfillment of meeting commitments on shipments Efficiency: An importer/buyer is concerned; he can plan his payment schedule properly by anticipating the requirements under letter of credit This arrangement makes importer for easier planning Based on timely delivery schedule, buyer receives goods on time thereby he can execute his business 10 plan smoothly and efficiently, in turn satisfying his clients promptly and effectively b Disadvantages: Strict compliance: One of the major disadvantages of letter of credit is that LC is operated on the basis of documentation and not on the basis of physical verification of goods on its quality, quantity or other parameters In other words, an LC issuing bank can effect payment to beneficiary of LC on the basis of documentation produced as per the terms and conditions of letter of credit The parties under letter of credit not have any right to physically verify the contents of goods So, if the buyer needs to confirm and satisfy on the quality of goods he buys, he can appoint an inspection agency of international repute and instruct exporter to enclose certificate of such inspection by mentioning a condition in letter of credit Once opened a confirmed and irrevocable letter of credit, the importer/buyer already tied up with the said business credit line and will not be able to change in between Due to various reasons, especially on selling price variation, if buyer needs to stop his export order he is unable to so Cost: Compared to other payment mode of transactions, cost of operating letter of credit procedures and formalities are more expensive Eventually, there may be additional expenses to an importer especially on amendment, negotiation etc To the exporter: a Advatages Security: The major advantage of Letter of credit to a supplier is minimizing of credit risk In an import and export trade, the geographical distance between importer and exporter is very far; hence ascertaining credit worthiness of buyer is a major threat In a mode of Letter of credit, such risk can be avoided Buyer is unable to deny payment by raising dispute on quality of goods, as letter of credit terms and conditions are based on documentation This is a major advantage of Letter of Credit in terms of seller point of view Some of the fraudulent buyers deliberately delays or hold payments by complaining on quality of goods In a letter of credit terms of business transactions, rejection of export payment by raising complaint on quality of goods will not be effected 11 Another thing that makes letter of credit add security to the exporter is demonstrated when disagreement occurs In the case of dispute between the trading partners, the exporter can withdraw the fund as agreed upon in the letter of credit and resolves the disputes later in the court The beneficiary’s right to the full amount is described in the phrase “pay now, litigate later” by the courts Efficiency: LC provides a security to exporter which is another advantage of a letter of credit Based on such security, the exporter can preplan his further business activities to strengthen his business world Assurance to receive money in full and on time is another advantage of letter of credit In a letter of credit, an exporter can ensure that he receives full amount as per LC which helps seller to plan future business ideas As you know, ‘finance at right time’ is a prime factor for any business transaction So if a business man receives his anticipated amount on time, he can plan his business activities smoothly without wasting time Meeting delivery schedule by proper production plan is one of the major advantages under a letter of credit terms of business Normally, under a non LC business terms, the buyer may keeps on changing delivery schedule as per their requirements time to time So this change of delivery schedule at importer’s interest leads exporter to rearrange his overall daily business activities Moreover, in a letter of credit, any dispute in transaction can be settled easily, as LC terms and conditions are under the guidelines of uniform customs and practice of documentary credit This is another advantageous to an exporter Normally and widely, a confirmed irrevocable LC is opened by buyer and seller which is suitable for both A ‘confirmed irrevocable letter of credit’ is a ‘confirmed order’ for any exporter is concerned So the exporter does not need to worry on cancellation of his export order or changes in said order This helps a lot for an exporter for his business plans in various levels including financial plans, minimizing production risk, saving time etc Time-saving: In a letter of credit, all required documents have been mentioned well in advance of shipment and there is no confusion or misunderstanding to 12 the importer (buyer) to inform supplier to act in between This is a good advantage for a supplier to preplan efficiently which saves time b Disadvantages: Cost: The most obvious disadvantages of letter of credit are large expenses Under letter of credit opening procedures, there are certain bank charges and other costs If buyer insists seller to pay such costs, the said charges will be additional expenses for the supplier Moreover, if exporter is aware that the credit worthiness of buyer is favorable and sound, he does not need to open a letter of credit to transact with such buyers However, he agrees on opening LC based on the requirements of buyer to enjoy the advantage of opening LC by buyer In such cases, meeting of all terms and conditions under letter of credit is the major responsibility of exporter Apart from meeting additional documentation procedures, exporter needs to spend additional expenses also Undeniably, compared to other modes of payment, the expenses for opening, negotiating and other procedures of letter of credit is high Currency fluctuation is another disadvantage of Letter of credit Normally buyer/importer places purchase orders once in a year and opens letter of credit accordingly The exchange rate may differ at the time of shipping goods, from the time of opening LC The exporter receives payment after shipment So, if any loss due to fluctuations in foreign currency contracted under letter of credit, need to be beard by him Liability: An exporter must verify the authenticity of opening bank The Letter of Credit opening bank should be a prime banker There are many cases of fraudulent LC opening bank who were not a prime banker and did not have proper ‘stand’ to follow the guidelines of uniform customs and practice of documentary credit So the strength and stability of LC issuing bank is a prime factor while discussing about the demerits of Letter of Credit While accepting a letter of credit, the exporter guarantees to meet the requirements of buyer as mutually agreed as per the terms and conditions mentioned in letter of credit So the liability of meeting all required parameters are with supplier failing which bank may not accept documents under such transaction Bank may debit certain charges against the discrepancy of 13 documents also if proper documentary proof has not been submitted along with other shipping documents So, if the exporter does not follow strictly with the terms and conditions of letter of credit with 100% compliance of documentation, the payment will not be effected by bank Political barrier: Policy of a country may affect the business transaction between countries If a cold war is being continued between two countries, due to political reasons, the trade bilateral agreement between such countries may become void, resulting to affect the guidelines of uniform customs and practice of documentary credit This is another demerit of LC for a seller A best caliber of personnel is required to monitor and navigate the process of letter of credit to provide no room for even minute discrepancy of documents III Risks analysis The main parties, which involve in the process of letters of credit, are exporter, importer, and banks The same as any payment pattern, all of these parties bear different risks The author, hereinafter, would like to analysis the risks for each party based on the two principles of credit The cases, which are provided by bank of China Peking branch, the author takes the analysis with some real case between Chinese companies and foreign companies Exporters’ risks As the beneficiary of letter of credit, if there are risks for the transaction, the exporter should be the first one who will bear the risks Generally, the risks for exporter may come from the importer Breach of strict compliance The importer applies the letter of credit from an issuing bank without strict compliance with the contract The terms and conditions of credit should be in compliance with the contract In many cases, however, the importer not open/issue the credit based on the sales contract because kinds of reasons This behavior makes difficult for the performance of contract difficult, or leads the added loss on exporters The most frequent situations are: importers not open the credit on time or not apply the credit from banks at all For example, in the case of concerning market change, strict restriction for the foreign currency, the importer will 14 alter the time or delay the time to open the letter of credit The importer adds some accessional clauses in the credit, for example, the importer may upgrade the kind of insurance; increase the amount of insurance; change the port of destination; change the packing, in order to get the purpose of changing the contract Or the importer may make many restrictions on the credit, which is considered as the “flexible clauses” Setting barriers in malice By using the crucial principle of letters of credit -“strict compliance” of documents and credit, the importer adds some conditions that are hard to achieve, or sets some business trap on purpose Such as unconfirmed clauses; credit with words mistakes and conflicted clauses on content It is not only a piece of cake that there are some words mistakes on letters of credit Those mistakes can be the typing mistakes of the beneficiary’s name, address, shipment, the expiry time, and so on The mistakes may affect directly the documents that must submit, and sometimes it will be the excuse for rejection of payment by the issuing bank Bogus letter of credit If importers use the bogus letter of credit, or steal the letter of credit with vacant form from a bank, or get the credit from a clerk who worked in a bank that has been or is going to be bankruptcy, the exporters may face the calamity of losing both goods and money There is such a case used to happen in a Chinese company.2 A trade company, which is in HeNan province in China, has received a documentary credit from a British bank The name of the British bank is standard chartered bank, Birmingham branch, England The amount of the credit is USD 37,200,000 and the advising bank is National Westminsterbank, London Since the credit cannot be advised by the local bank of beneficiary3 as usual, it is hard to confirm the authenticity of the credit After the examination to the credit from a Chinese local bank, there are some doubtful points: Flexible clauses: In background section Case from the bank of china, which provided by the worker in bank of china perking branch The advising bank should be a local bank in the country of exporter based on the international convention In this case the advising bank should be a Chinese bank 15 a The form of letter of credit is not dated; no consignor address on the face of envelope; it is impossible to recognize the post address because of the ambiguous letter stamp b The credit appoints the advising bank - National Westminster bank as the negotiating bank, which is deviant c The address of accepting bank cannot be found in the “bank yearbook” d The significant of credit is printing words instead of handwriting, which cannot be identified e The goods are required to transport by air to Nigeria, where always happen the credit fraud cases According to the doubtful points above, the letter of credit is considered to be a bogus credit on the appearance Requests of special documents The importer asks for the documents that are hard to achieve Some importers regulate the requests that cannot be fulfilled or controlled by the exporters Such requests may be: under the terms of FOB4& CFR5, the exporter can ask the payment only within the return receipt of insurance; or the documents with some specific signature For example, according to the clauses of credit, the importer asks the beneficiary to provide the certificates for the quality, quantity, and price of the goods These certificates must be issued by the “commodity inspection bureau” Basing on the regulation of commodity inspection authority in most countries, however, the authority can only issue the certificates for the quality and quantity of the commodity Commodity price is considered to be a business factor, which does not belong the responsibility of the inspection process This request is the typical example of the clause, which exporters cannot achieve Conflict between clauses of credit and related law FOB: In background section CFR: In background section 10 16 The clauses of credit are not accordant with the law of related country In the real practice of international trade, some clauses in the credit are advantage to the exporter on the appearance The noticeable point is that if the clauses are allowed according to the law of importer’s country The exporter should know the law in related country, and negotiated the clauses that cannot be implemented in the importer’s country Otherwise, the exporter will not only loss the advantage in contract, but also involves in the restriction of another national law For example, the accrual and final discount fee is responsible by the importer according to the letter of credit The reasons are: citizens should turn in the income tax of the interest based on the national or state law There is a case involving the different tax law between China and France A Chinese exporter company finances a deferred letter of credit The French importer company made agreement with the Chinese export company that the French company is going to be responsible for the entire fee caused by the accrual This agreement is also accordant to the Chinese tax law Whereas the French tax law is different on such regulation Based on the French tax law Art.125, Paris National bank made bold to deduct 30% accrual tax from the whole accrual that the beneficiary (the Chinese export company) should get Both the importer and exporter know that the levied object is the French importer company Furthermore, Italy and Cyprus have the same tax regulation as France As the exporters, merchandisers should think more about the law in another country, and negotiate with the importer for the clauses that may involve deducting the income tax of accrual Another law problem is on insurance with a case as follows A British bank issued a letter of credit and the clauses of credit ask for insuring in both London Association insurance company and insurance company of P.R.China The Chinese exporter should buy the “all risks”7 from London Association insurance company, and buy the “war risks”47 in insurance company of P.R.China Although these two different insurances can insure at the same time, based on the regulation of insurance company of P.R.China, the client cannot insure in a Chinese insurance company and a foreign Case is provided by bank of china, Peking branch All Risks: In background section 11 17 insurance company in simultaneity The exporter only can choose one insurance company Fraud by altering letter of credit Importers alter the overdue letters of credit purposely The exporter may be cheated for their goods by this altered credit Importers change the amount, the date of shipment, and beneficiary’s name of the overdue credit With the purpose of finance the money by a credit from the bank, importers may prevail the exporters on issuing the credit The correlative case in China happened on a trade company in JiangSu province The JiangSu trade company received a letter of credit, which was delivered by a HongKong client though the bank The amount of the credit is USD 3,180,000 The branch bank of China found the obvious altered traces on the credit by auditing the credit The credit has been altered the amount, date of shipment, name of beneficiary The branch bank of China reminded the beneficiary (JiangSu trade company), and inquired about the credit from the issuing bank immediately At last, it is substantiated as a fraud case by using the overdue credit The HongKong Company tried to give the overdue credit to the exporter, then use it as a mortgage and get money from the bank Other risks out of the essential of letter of credit The content of clauses is not belonging to the essential of letter of credit deal If the letters of credit regulates that the negotiating bank pay only when commodity arrives the destination, after the eligibility of commodity inspection, or after getting the ratify foreign currency manage authority, these are not the transaction point of credit, and there is no guarantee for the exporters Importer’s risks The author discusses the possible risks on the side of exporters; whereas, the importers should also bear some risks when use letter of credit The author would also choose a case9 study hereinafter to analysis the risks on the side of importers Case is provided by bank of China, Peking branch Case is provided by bank of china, Peking branch 18 Chinese company A made a contract with a British company B Company A will import steel from company B The amount of commodity is USD 5,040,000, and the parties decided to pay with letter of credit As the importer, company A opened the letters of credit through an issuing bank in China During the period of validity of shipment, company A received the fax from company B and was informed that the steel had been in shipment on time Soon, the issuing bank received the whole set bill of documents from negotiating bank According to the bill of lading, the goods are loaded on a port of Eastern Europe, and transferred to china from a port of Western Europe There was no discrepancy after auditing the documents The issuing bank discounted the credit to company B according to the normal procedure Company A felt weird after waiting for one month without any message of the goods Company A inquired about the matter to London maritime affairs bureau The feedback is: there was no named ship loading the steel on the given date that is offered by company A The case is concluded as a typical fraud case by forging the bill of documents When A realized that, issuing bank had discounted and the negotiating bank had paid to the beneficiary Company A faced a big loss.The key issue of this case is that how much risk to the importers under the transaction of letter of credit When people talk about UCP 500, the convention protects beneficiary much more than the applicant That means, exporters get more protection from the UCP 500 more than the importers From this profile, the author would discuss the risks on importers with the following statement Fraud risks As the case described above, the operation of letters of credit may be considered as an operation of documents The related parties finish their responsibility based on those bill of documents The only evidence for issuing bank is the strict compliance between documents and credits As long as the documents are in strict compliance, the issuing bank has to pay According to UCP 500 Art.1510 “…Bank assumes no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification … of any document(s)…”, “…nor they assume any liability or responsibility for the … good faith or acts and/or omissions, solvency, performance or standing of the …” related 10 Art 15, ‘disclaimer on effectiveness of documents’, UCP 500 19 parties Bank forms a tradition that they only examine the authenticity of the documents on their face, and pay no need to the essential reality of the documents Furthermore, to examine the essential reality of the documents has exceeded the specialty ken of banks, so banks cannot more on that Although “…banks must examine all documents stipulated in the credit with reasonable care…”11 UCP 500 Art.13, and Art.15 regulate the “…disclaimer on effectiveness of documents…” 12 for the banks The principle of strict compliance provides the soil for fraud under the terms of letters of credit Quality risk The quality risks, which importers should bear under the term of letters of credit, are that exporters trade importers with the shoddy commodity From the characteristic of documentary deal 13 under the terms of letter of credit, the importer can get the whole set of documents to pick up the goods only after payment or discount Before this, the importer cannot know if the exporters provide the commodity with good quality The importers will stand on the passive side Moreover, if the importer find the quality problem of the commodity after payment or discount, it is hard to get the protection through the legal way Exchange rate risk No matter what kind of letter of credit (insight letter of credit or deferred letter of credit), there is a time distance from issuing letter of credit to the actual payment for importers This long time distance may cause a big fluctuant of the exchange rate If under the term of insight letter of credit, there is a time distance from the credit issuing date to consignment, and arrival of document in the issuing bank Then also the time for documents examination should be plused If under the term of deferred letter of credit, the time distance will add the time from acceptant date to expiry date 11 Art 13, ‘standard for examination of documents’, UCP 500 12 Under the terms of LC, documents are considered as the exclusive evidence to meet the payment 13 What is the documentary deal for LC 20 In international trade, the longer the time lasts, the more exchange rate risks exist Once the exchange rate of paying currency increasing 14, the importer has to pay more than the anticipative amount There is an adage that “exchange rate is more ferocious than tiger”, which describe the big risk caused by exchange rate Marketing risk The import commodity may face a marketing risk, whether they are the material for remachining or the goods which access the trade circulate directly In case, the price of the same goods in domestic market goes down, then the relative price of import good rises up It will affect the goods circulation of the market, and causes the overstock56 Even the import goods, which used for re-machining, may also cause the high cost of the new finished product.15 These will lead the loss of importers Banks risks Under the term of letter of credit, a bank may “add its name to a transaction” by providing payment risk security As the basic principle of letter of credit - “strict compliance” for the documents and credit, in the author’s opinion, examination of the documents is the main risk for banks “… there is no room for documents which are almost the same, or which will just as well … if the bank does as it is told, it is safe; it declines to anything else, it is safe; it departs from the conditions laid down, it acts at own risk…”16 A British court developed this statement about strict compliance in 1927 The principle of strict compliance is ruled in Art.13 and Art.15 of the UCP 500 Banks are no experts regarding goods and trade They not have enough knowledge to judge about goods and they cannot overview the terms and conditions between the applicant (importer) and the beneficiary (exporter) The risk therefore exists that there are discrepancies on the credit when they found the obviously discrepancies Those discrepancies may come from the result of fraudulent document, and cause big damage to the bank and beneficiary Art 15 of UCP 500 14 exchange rate of a currency increasing can be also considered as the appreciation of that currency 15 See figure 5.4 16 Cited in Ramberg (international commercial transactions) page 144 21 contain a disclaimer for the risks of bank However, banks can be liable for losses and damages, if a bank does not fulfill its obligation to examine the documents in a reasonable way 22 Conclusions and future study Letter of Credit is a secured method of payment that protects both importers and exporters However, there are advantages and disadvantages existing in this method, and also the risks that both parties have to bear to enter this way of payment To the importers, L/C helps to save time, strengthen security and boost efficiency but only with strict compliance and at a relatively high cost Like the importers, exporters also take the advatages of this time-saving, secured and efficient method, but they have to have more liablities and be cautious with the political barriers Entering a letter of credit is the most favored way of transactions for big contract with high value, but that doesn’t mean there are no risks taken Both parties need to bear certain threats As the beneficiary of letter of credit, the exporter should be the first one who will bear the risks Generally, the risks for exporter may come from the importer, such as breach of strict compliance, setting barriers in malice, bogus letter of credit, requests of especial documents, conflict between clauses of credit and related law, fraud by altering letter of credit, and some other risks As the recipient of the goods and the one who pays, importers need to care about fraud, quality, exchange rate, marketing risks, diathesis risk of the issuing bank and other banks’ risks In this research paper, we only analyse all the advantages, disadvantages and risks that importers and exporters need to pay attention to, using payment made by documentary letter of credit Since we are not able to study the cases further due to lack of time and faculities, we hope that we have led you through all the process of using a Letter of Credit and given you a very close look of what both parties have to go through to make a successful purchase We suggest future works to work further in how to minimize the risks and perhaps study into a new payment method even more effective than documentary Letter of Credit At last, we thank Mrs Phan Kim Thoa for her incredibly useful lessons which guide us through And we hope you to forgive all the flaws there may be in research paper Thank you very much! 23 References MA Phan Kim Thoa, English for specific purposes, International Business, Hanoi, Vietnam, 2017 Cranstom.Ross, Principle of banking law, Oxford, New York, Athens 1997, page 158 French tax law, French corporate taxation-a brief overview http://www.triplet.com/40-10-corporate/40-70-taxlaw.asp 24 ... mortgage and get money from the bank Other risks out of the essential of letter of credit The content of clauses is not belonging to the essential of letter of credit deal If the letters of credit. .. Advantages and disadvantages of payments made by Documentary Letter of Credit A letter of credit enjoys various advantages by being highly customizable and reducing credit risks but also brings some disadvantages. .. in a letter of credit cycle .7 Parties to a letter of credit .7 Procedure involves in a letter of credit II Advantages and disadvantages of payments made by Letter of Credit