Discrepancies in Letters of Credit

There are certain risks associated with every Letter of Credit transaction.  The issuing bank is likely to insist on strict compliance with the documentation requirements of the Letter of Credit.  If the documents presented by the seller do not comply exactly with the requirements of the Letter of Credit, it is possible that the seller will not be able to collect against the L/C.  The buyer may agree to waive any discrepancies in the documents presented by the seller.  If the buyer and the bank(s) agrees, a payment under the Letter of Credit can still occur. However, all parties must agree to waive documentation discrepancies in order for the seller to be paid under the L/C.  This can present a problem if:

(a) The issuing bank is concerned about the creditworthiness of the applicant / buyer, or
(b) If the confirming bank is concerned about the wisdom of its decision to confirm the Letter of Credit.

In either of these scenarios, a discrepancy in the documentation provided can be the justification needed not to honor and fund the letter of credit. There is nothing unlawful about this scenario. Creditors need to know that once a discrepancy is found, if it cannot be corrected or if the discrepancy cannot be corrected within the time limitations attached to the Letter of Credit then the Letter of Credit may offer no protection and no guarantee of payment to the Seller.

Common Letter of Credit Discrepancies:

• The name and/or address of exporter or customer are misspelled. 
• The Letter of Credit (L/C) expired prior to presentation of draft and other documents. 
• The Bill of Lading evidences delivery prior to or after the date range stated in the L/C. For example, the bill of lading shipping date is later than that allowed in the L/C. 
• Changes are included on the invoice that are not authorized in the L/C. For example, instructions in the L/C that are different from those on the invoice. 
• The description of the goods is inconsistent, or there is an incomplete or inaccurate description of merchandise, price, and terms of payment. 
• There are errors in the insurance documents. 
• The invoice amount is not equal to the draft amount. 
• Ports of loading and destination are not as specified in the L/C.
• The description of merchandise is not as stated in L/C. Omission of the word "about" or approximately (which allows for 10% variance) preceding the amount of credit. 
• A document required by the L/C is not included in the package of documents presented by the seller to the confirming, advising or issuing bank. 
• Documents are inconsistent as to general information such as volume, quality, etc. 
• The invoice is not signed as required in the L/C, or marks and number on the invoice are different from those on other documents.
• Invoice value or draft exceeds amount available under Letter of Credit
• Charges included in invoice are not authorized in Letter of Credit
• Amount of insurance coverage is inadequate or coverage does not include risks required by Letter of Credit 
• Insurance document is not endorsed and/or countersigned 
• Date of insurance policy or certificate is later than date on bills of lading
• Bills of lading are not clean-that is, they bear notations that qualify good order and condition of merchandise or its packing 
• Bills of lading are not marked "on board" when so required by Letter of Credit 
• "On board" endorsement or changes on bills of lading are not signed by carrier or its agent or initiated by party who signed bills of lading 
• "On board" endorsement is not dated 
• Bills of lading are not endorsed 
• Bills of lading are made out "to order" (shipper's order, blank endorsed) where Letter of Credit stipulates "straight" (direct to consignee) bills of lading or vice versa. [In some countries, "to order" bills of lading are prohibited and heavy penalties or additional duties are assessed for failure to ship on a "straight" bill of lading.] 
• Bills of lading do not indicate "freight prepaid" or "freight collect" as stipulated in the Letter of Credit 
• Bills of lading are marked "freight prepaid" and freight charges are not included in invoice 
• Descriptions, marks and numbers of merchandise are not the same on all documents presented or are not as required by Letter of Credit 
• Not all documents required by Letter of Credit are presented 
• Documents are "stale dated" that is, not presented within a reasonable time after issuance
• Invoice does not specify shipment terms (C&F, CIF, FOB, etc.) as stated in Letter of Credit
• Invoice is not signed as Letter of Credit requires

One final comment:  A Letter of Credit can be thought of as an unconditional promise by the issuing bank NOT to pay the beneficiary seller unless the documents received by the bank are exactly as required in the L/C and presented within the time limits defined in the Letter of Credit itself or based on the deadlines described in the UCP 600. 

Edited by Michael Dennis.  Mr. Dennis is a consultant and the author of "Credit and Collection Handbook."   He can be reached by email at mcdennis13@yahoo.com.