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Assignment of Proceeds: Meaning, Pros and Cons, Example

Diane Costagliola is a researcher, librarian, instructor, and writer who has published articles on personal finance, home buying, and foreclosure.

assignment of proceeds under a documentary credit

Investopedia / Jiaqi Zhou

What Is an Assignment of Proceeds?

An assignment of proceeds occurs when a beneficiary transfers all or part of the proceeds from a letter of credit to a third-party beneficiary . Assigning the proceeds from a letter of credit can be utilized in many types of scenarios, such as to pay suppliers or vendors in a business transaction or to settle other debts.

Key Takeaways

  • An assignment of proceeds can be used to redirect funds from a line of credit to a third party.
  • An assignment of proceeds must be approved by the financial institution that granted the line of credit following a request and fulfillment of any obligations by the original beneficiary.
  • A benefit of this type of transaction is the ability to redirect only a portion of the proceeds, in which case both the original beneficiary and third party can access the same letter of credit.
  • A drawback of this type of transaction is that the original beneficiary is still responsible for fulfilling all requirements under the letter of credit, even when the funds are redirected to the third party.
  • This type of transaction is used in a number of circumstances, such as when paying suppliers or vendors, or when settling outstanding debts.

Understanding an Assignment of Proceeds

A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. The original beneficiary, the named party who is entitled to receive the proceeds from a letter of credit, may choose to have them delivered to a third party instead, through an "assignment of proceeds."

Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade.

In order to process an assignment of proceeds, the original beneficiary of the letter of credit must submit a request to the bank or other financial institution issuing the letter of credit requesting to assign the funds to a different individual or company. The assignment of proceeds will need to be approved by the financial institution once it is submitted, pending the fulfillment of any requirements set forth in the letter of credit.

If the original beneficiary does not meet the obligations outlined in the letter of credit, no assignment will take place. Once approved, the bank or other entity will release the money to the specified third party to be drawn upon at will.

Advantages and Disadvantages of an Assignment of Proceeds

The main benefit of an assignment of proceeds is that the original beneficiary has the ability to assign all or just a portion of the letter of credit to the third party. The original beneficiary will retain access to any portion of the proceeds not redirected to the third party. This allows both entities to make use of the same letter of credit when necessary.

This benefit must be weighed against the potential drawback of this type of transaction. When an assignment of proceeds takes place, the financial institution is not contracting directly with the third-party beneficiary. It is only acting as an agent in supplying the funds to the third party. The original beneficiary is still responsible for completing any and all requirements under the letter of credit.

Example of an Assignment of Proceeds

Assume XYZ Customer, in Brazil, is purchasing widgets from ABC Manufacturer, in the United States. In order to sign off on the deal, ABC Manufacturer requires that XYZ Customer obtains a letter of credit from a bank to mitigate the risk that XYZ may not pay ABC for the widgets once ABC has shipped them out of the country.

At this point, ABC Manufacturer is able to request that a portion of these funds be redirected to DEF Supplier, whom ABC still owes money for parts used in making the widgets. Even though a portion of the funds has been redirected to DEF Supplier, ABC Manufacturer still has to fulfill its obligations under the letter of credit, such as shipping out the widgets to XYZ.

assignment of proceeds under a documentary credit

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§ 5-114. Assignment of Proceeds.

(a) In this section, "proceeds of a letter of credit" means the cash, check, accepted draft, or other item of value paid or delivered upon honor or giving of value by the issuer or any nominated person under the letter of credit . The term does not include a beneficiary's drawing rights or documents presented by the beneficiary.

(b) A beneficiary may assign its right to part or all of the proceeds of a letter of credit. The beneficiary may do so before presentation as a present assignment of its right to receive proceeds contingent upon its compliance with the terms and conditions of the letter of credit .

(c) An issuer or nominated person need not recognize an assignment of proceeds of a letter of credit until it consents to the assignment.

(d) An issuer or nominated person has no obligation to give or withhold its consent to an assignment of proceeds of a letter of credit, but consent may not be unreasonably withheld if the assignee possesses and exhibits the letter of credit and presentation of the letter of credit is a condition to honor .

(e) Rights of a transferee beneficiary or nominated person are independent of the beneficiary's assignment of the proceeds of a letter of credit and are superior to the assignee's right to the proceeds.

(f) Neither the rights recognized by this section between an assignee and an issuer , transferee beneficiary , or nominated person nor the issuer's or nominated person's payment of proceeds to an assignee or a third person affect the rights between the assignee and any person other than the issuer, transferee beneficiary, or nominated person. The mode of creating and perfecting a security interest in or granting an assignment of a beneficiary's rights to proceeds is governed by Article 9 or other law. Against persons other than the issuer, transferee beneficiary, or nominated person, the rights and obligations arising upon the creation of a security interest or other assignment of a beneficiary's right to proceeds and its perfection are governed by Article 9 or other law.

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UCP 600 📚 – Ultimate 2024 Guide ✔️

Ucp 600 📚 guide - uniform customs and practice for documentary credits (updated 2024) ✔️.

UCP 600

What is UCP?

The Uniform Customs and Practice for Documentary Credits (“UCP”) is the rule governing the Documentary credits. It was established by the international chamber of commerce (ICC) to mitigate the doubts caused by individual countries promoting their own national rules on documentary credit practice. The objective, since attained, was to create a set of contractual rules that would establish uniformity in that practice, obtain global understanding, a common interpretation and application of documentary credit, so that practitioners would not have to cope with plenty of conflicting national regulations. UCP is the most successful set of private rules for trade ever developed.

A brief history The origins of UCP 600 UCP 600 – Commentary URR 725 ISBP 745 UCP 600 – ICC Recommendation Papers UCP 600 – Revision UCP 700 wish list eUCP eUCP v2.0 & UCP 600 eUCP Case Studies Summary

UCP 600

UCP 500 versus UCP 600 – A brief history

The first version of the rules published by ICC in 1933 known as (UCP 82), it has been revised six times to keep pace with market needs and practices, in 1951 (UCP 151), 1962 (UCP 222), 1974 (UCP 290), 1983 (UCP 400), 1993 (UCP 500) and the latest version in 2007 known as (UCP 600). First published in December 2006 and implemented on 1 July 2007.

UCP

The origin of UCP 600 and its purpose

UCP 600 is the fruit of more than three years of work by the International Chamber of Commerce’s (ICC) Commission on Banking Technique and Practice. One of the most important objectives of the UCP 600 is providing easier language and addressing the progress in various industries to unify the interpretation and application of documentary credits.

The main issues that considered in shaping UCP 600

  • Addressing developments in banking, transport and insurance industries.
  • Easier language and style to remove wordings that could lead to inconsistent application and interpretation.
  • Reviewing ICC Opinions, DOCDEX Decisions.
  • Considering the incorporation of or relationship with, ISBP 645, URR 525, ISP 98 and eUCP.

Key Sections and Articles for the UCP 600

it comprises of 39 articles to cover the following:

  • Scope and application of the rules (article 1)
  • Definitions and interpretations (articles 2 and 3)
  • Obligations and liabilities (from article 4 to 13)
  • Examination and dealing with documents (from article 14 to 17)
  • Documents including commercial invoice, transport documents and insurance document (from article 18 to 28)
  • Miscellaneous Provisions (from article 19 to 33)
  • Disclaimers (from article 34 to 37)
  • Transfer and assignments (articles 38 and 39)

UCP

UCP 600 commentary

The publication provides the text of each article, the changes from UCP 500, the commentary explaining and analysing each article and sub-article of UCP 600 and cross-reference to other articles.

The commentary reflects the view of the drafting group, users of the commentary should also be aware that the decision to accept or reject documents depends on the terms and conditions of the credit, the applicable provisions of UCP 600 not the commentary and international standard banking practice.

The introduction to the commentary on UCP 600 states: ‘the writing of the Commentary proved to be more difficult than drafting the rules themselves.’

With around 5000 comments received by the Drafting Group during the revision process, it was impossible for them to provide feedback on every issue that did or did not make it into the text of UCP 600.

These issues included, amongst others, the following items:

  • Should the words “on its face” remain within the UCP?
  • What was the value of the concept of “reasonable time” when there was no common standard for determining reasonableness globally?
  • Should the UCP now reflect the growing practice of documentary credits being issued by non-banks, by substituting “issuer”, “confirmer”, etc., for the terms “issuing bank”, “confirming bank”, etc., that had been used in past UCPs?
  • Was a majority of the Banking Commission in favour of including a rule covering the ability of a nominated bank to prepay or purchase a draft it accepted or a deferred payment it incurred?
  • Was there a need for an equivalent of UCP 500 article 30 when the UCP transport document articles do not mention who is actually to “issue” the respective transport document?

All of the points were debated at some length by national committees tasked with providing input, so that the Drafting Group could gauge where their representatives on the Banking Commission wished an article to be positioned.

The objective of the commentary to enlighten practitioners about the processes behind the changes in each article and to explain why a change was introduced, why no change was made, why some issues may appear new but are not, i.e., a clarification rather than a change, and to suggest the way the wording in UCP 600 should be understood and applied.

After UCP 600

UCP

As a result of the huge growth in the volume of inter-bank currency reimbursements remained largely subject to locally accepted practice in the major financial centres, with the one exception of the U.S.A, where banks had formulated their own operating rules, moreover, the practices around bank-to-bank reimbursements under documentary credits developed into more complicated procedures followed by banks not a party to the documentary credits providing the beneficiary with reimbursement promptly. To meet the need for international standards and to assist trade facilitation, the ICC banking commission authorized a working party to draft the Uniform Rules for Bank-to-Bank Reimbursements (URR 525) in 1993 and implemented on 1 July 1996.

The update to URR 525 was necessary to bring the URR rules into conformity with the UCP 600, in April 2008 URR 725 was approved by the ICC national committees and implemented in October 2008. URR 725 should not be seen as a revision of URR 525. It is an updating process that has followed the same manner as the eUCP, i.e. to change the style to match that of UCP 600.

Banks that are requested or authorized to add their confirmation often require from an issuing bank before adding their confirmation to specify a reimbursing bank instead of reimbursed directly by an issuing bank. UCP 600 article 13, covers basic principles for bank-to-bank reimbursements. URR 725 covers these principles in more details and clarification, such as general provisions and definitions, liabilities and responsibilities, form and notification of authorizations, amendments and claims and miscellaneous provisions.

It comprises of 17 articles as the following:

  • Application of URR
  • Definitions
  • Reimbursement Authorizations Versus Credits
  • Honour of a Reimbursement Claim
  • Responsibility of the Issuing Bank
  • Issuance and Receipt of a Reimbursement Authorization or Reimbursement Amendment
  • Expiry of a Reimbursement Authorization
  • Amendment or Cancellation of a Reimbursement Authorization
  • Reimbursement Undertaking
  • Standards for a Reimbursement Claim
  • Processing a Reimbursement Claim
  • Duplication of a Reimbursement Authorization
  • Foreign Laws and Usages
  • Disclaimer on the Transmission of Messages
  • Force Majeure
  • Interest Claims/Loss of Value

UCP

What is ISBP 745?

With the approval of UCP 600 in October 2006, it has become necessary to provide an updated version of the International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP 645). The first version was Issued in 2003, it was felt appropriate, paragraphs that appeared in Publication 645 and that have been covered in effectively the same text in UCP 600 have been removed from the updated version of ISBP, publication 681 is the first revision of ISBP 645. The introduction to UCP 600, states: ‘During the revision process, notice was taken of the considerable work that had been completed in creating the International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP), ICC Publication 645’.

A fully revised version of ISBP 681 was undertaken, in July 2013 ISBP 745 was published. It filled a gap between the general rules of the UCP 600 and the daily job of the documentary credit practitioners and provides coverage of documents which are not specifically mentioned in UCP 600, as well as, it serves as a valuable tool for parties to correctly apply the principles of UCP 600 and accurately interpret and clarify conditions appearing within documentary credits, it covers a range of practices outlined by ICC Opinions issued since 2007, decisions of the ICC Banking Commission, and has been extended to cover documents including non-negotiable sea waybill, beneficiary certificate,  packing list, weight list, beneficiary certificates, analysis, inspection, health, phytosanitary, quantity and quality certificates.

It should be noted ISBP 745 doesn’t modify or exclude UCP 600 articles and both should be read in their entirety and not in isolation. To emphasize this point, paragraph i. of Preliminary Considerations reads “This publication is to be read in conjunction with UCP 600 and not in isolation.”

Thierry Senechal, ICC Senior Policy Manager and Banking Commission Executive Secretary said: “This guide has developed into an invaluable aid to banks, corporates, logistics specialists and insurance companies alike, on a global basis, when creating documents for presentation, or for the examination of documents presented under, a documentary credit.”

Gary Collyer, Chair of the Drafting Group for the revision of ISBP, said: “Rejection rates have decreased since the original launch of the ISBP guide in 2002 and it is acknowledged that a major contributing factor to this is the application of the practices detailed in ISBP.”

Each section begins with an alphabetical letter as the following:

  • (I-VII) PRELIMINARY CONSIDERATIONS
  • A) GENERAL PRINCIPLES
  • B) DRAFTS AND CALCULATION OF MATURITY DATE
  • C) INVOICES
  • D) TRANSPORT DOCUMENT COVERING AT LEAST TWO DIFFERENT MODES OF TRANSPORT (“MULTIMODAL OR COMBINED TRANSPORT DOCUMENT”
  • E) BILL OF LADING
  • F) NON-NEGOTIABLE SEA WAYBILL
  • G) CHARTER PARTY BILL OF LADING
  • H) AIR TRANSPORT DOCUMENT
  • J) ROAD, RAIL OR INLAND WATERWAY TRANSPORT DOCUMENTS
  • K) INSURANCE DOCUMENT AND COVERAGE
  • L) CERTIFICATE OF ORIGIN
  • M) PACKING LIST, NOTE OR SLIP (“PACKING LIST”)
  • N) WEIGHT LIST, NOTE OR SLIP (“WEIGHT LIST”)
  • P) BENEFICIARY’S CERTIFICATE
  • Q) ANALYSIS, INSPECTION, HEALTH, PHYTOSANITARY, QUANTITY, QUALITY AND OTHER CERTIFICATES (“CERTIFICATE”)

UCP

ICC guidelines and guidance papers

The ICC recommendation and guidance papers do not amend the UCP rules or International Standard Banking Practice (ISBP), the papers act as a response from the ICC when various banks are applying unilateral and incorrect interpretations to certain articles and clarifying the proper interpretation and application when it determines that there is a need to do so, furthermore, to share practical views and guidance from experts in the management of trade finance transactions when exceptional events and issues arise for example this exceptional period because of the novel coronavirus (“COVID-19”).

  • The requirements for an on-board notation
  • The use of sanction clauses in trade finance-related instruments subject to ICC rules
  • Notes on the principle of strict compliance
  • Decision of the ICC in respect of a revision of UCP 600
  • The use of drafts (bills of exchange) under documentary credits
  • Notes for Documentary Credit Formats
  • The impact of COVID-19 on trade finance transactions issued subject to ICC rules
  • Addendum to guidance paper on the use of sanctions clauses 2014
  • The correct interpretation of the first paragraph of UCP 600 article 35

UCP

UCP 600 revision

Which is the latest version of ucp.

UCP rules revised six times since the first publication in 1933, the period between each revision range from 9 to 14 years, on 15 th   June 2017 ICC Executive Committee released a document NO.470/1272 to announce their decision after the voting that held with National Committee Forum in Rome on 8 th November 2016 and on 23 rd November 2016 in Paris in respect of a revision of UCP 600, the results were that the majority of National Committees preferred not to proceed with a revision, despite there were a few counter-views and comments were given supporting a UCP revision.

Summary of the ICC decision in respect of a revision of UCP 600

It is not considered, at this stage, to be appropriate to revise UCP 600 as the most of the problems lay not with the rules themselves, but with the application, i.e. practice of the rules (“international standard banking practice”).

50% of the problems apply to the presented documents: it is a justifiable assumption that a greater understanding of ISBP 745 would help alleviate these problems and greatly reduce this percentage, the remaining 50%, it is difficult to see how a revision of UCP would make much of a material difference as many of these causes are outside the scope of correction by the beneficiary.

UCP

The majority of problems are caused by:

  • poor drafting of the credit
  • Lack of understanding of documentary credit workflows and the principles of UCP 600
  • Lack of attention to detail and management of the production, shipment and document collation processes
  • Excessive and unnecessary data being added to documents
  • Restricted access to ISBP 745

Only seven items were identified for possible inclusion in a revision of UCP and most of these were already an integral part of ISBP 745. No new problems were raised which would prove that existing rules are wrong or that there is a gap.

The ICC Executive Committee Decision is greater understanding of practices should be the way forward, rather than a revision of the rules and this will be achieved by the implementation of a three-prong facilitation approach:

UCP

Overcoming the above problems

The following recommendations should be considered which could potentially reduce discrepancy ratios under documentary credits, as the rates of non-compliance are quite high, specifically on the first presentation.

  • As stated in ISBP 745 Preliminary Considerations (iv), ‘many of the problems that arise at the document examination stage could be avoided or resolved by the respective parties through careful attention to detail in the credit or amendment application and issuance of the credit or any amendment thereto’.
  • An issuing bank should ensure that any credit or amendment it issues is not ambiguous or its wording subject to more than one interpretation and conflicting in its terms and conditions as most of the difficulties and complications that arise from poorly or badly drafted credits.
  • Avoid inserting excessive details and including terms which only belong to an underlying agreement/contract that cause unintended consequences and payment delays.
  • The applicant and beneficiary should carefully consider the documents required for presentation, by whom they are to be issued, their data content and the time frame in which they are to be presented.
  • Documentary credits must not include conditions for which fulfilment cannot be ascertained from the face of a document.
  • Avoiding as much as possible to exclude or modify specific articles or sub-articles of UCP 600 unless that is necessary.
  • Only necessary documents should be required by the credit and ensure the document descriptions are as simple as possible at the same time to meet any contractual requirements.
  • Avoid adding generic requirements that are to apply to all presented documents.

UCP 700 wish list

UCP

As mentioned above the ICC executive committee stated they won’t revise UCP 600 anytime soon, on the other hand, it also states there are issues identified for possible inclusion in a revision of UCP. Several issues highlighted by trade finance experts for example:

  • Kim Sindberg in his blog ‘ UCP 700 – on the table? ’ He outlined the framework and the issues that needed to be addressed and indicated what should/could be changed under UCP 600 articles and why.
  • David Meynell and Gary Collyer in their blogs ‘ UCP 700 ’ & ‘UCP gaps’ They addressed a number of issues that seem rational for a new version of UCP 600.

A few of these issues outlined below:

  • The removal of the reference to standby letter of credit.
  • The removal of the reference to ‘draft’.
  • The removal of ‘negotiation’ as a form of availability.
  • Should a sanctions article be added, or perhaps be included as a sub-article of article 36 ‘Force Majeure’?
  • Transport, UCP should provide a correct reflection of market conditions, including transport and logistics.
  • Inoperative credits, a clarification as to how and when the credit becomes operative.
  • Some paragraphs from ISBP 745 that are more appropriate to be a rule rather than a practice.
  • Suggestions for specific articles to be removed, reworked, reshaped or merged with ISBP.

UCP

The Uniform Customs and Practice for Documentary Credits (UCP) Supplement for Electronic Presentations (“eUCP”) first published in 2002 as version 1.0 supplemented UCP 500, later updated as version 1.1 in 2007 to accompany the publication of UCP 600 and to bring it in line with the changes in terminology in UCP 600 and recently as version 2.0 in 2019 in order to accommodate current practice, technological developments and the continuing evolution toward electronic presentation. The rules were intentionally developed with version numbers in order to be updated regularly when required according to future technological developments that emerge in trade finance and without impacting upon other existing ICC rules.

Olivier Paul, ICC Director for Finance Development said: “The digitalisation of trade is becoming more and more a reality. By releasing the new eRules, ICC is taking another step in the right direction to ensure that our rules are adapted to new realities,”

David Meynell, Co-Chair of the Working Group and Owner, TradeLC Advisory said: “Extending the mitigation of risk from a paper environment to the electronic milieu safeguards the applicability of ICC rules whilst guaranteeing relevance in a constantly evolving digital trade world.”

By acknowledging the importance of the eRules, the ICC has made the full text of the eUCP available online for the use of trade finance practitioners everywhere. ICC has also published an article-by-article analysis of eUCP V2.0 and eURC V1.0 to guide banks on the new rules.

It is worth mentioning that, the eUCP doesn’t  address or define the method that is necessary to facilitate electronic presentation, these are left to the parties to agree on the platform or the system to be used.

It comprises of 14 articles, in order to avoid confusion between the articles of UCP and the eUCP the articles are numbered with an ‘e’ preceding each article number as the following:

  • e1 Scope of the Uniform Customs and Practice for Documentary Credits (UCP 600) Supplement for Electronic Presentations (“eUCP”)
  • e2 Relationship of the eUCP to the UCP
  • e3 Definitions
  • e4 Electronic Records and Paper Documents V. Goods, Services or Performance (new article)
  • e6 Presentation
  • e7 Examination
  • e8 Notice of Refusal
  • e9 Originals and Copies
  • e10 Date of Issuance
  • e11 Transport
  • e12 Data Corruption of an Electronic Record
  • e13 Additional Disclaimer of Liability for Presentation of Electronic Records under eUCP
  • e14 Force Majeure (new article)

UCP

The relation between eUCP V2.0 & UCP 600 articles

  • The eUCP V2.0 is a supplement to UCP 600 and to be used in conjunction with UCP 600.
  • It shall apply where the credit indicates that is subject to eUCP V2.0.
  • Credits issued subject to eUCP V2.0 are automatically subject to UCP 600 without specific reference.
  • An eUCP credit must indicate the applicable version of the eUCP. If not indicated, it is subject to the latest version in effect on the date the eUCP credit is issued or, if made subject to the eUCP by an amendment accepted by the beneficiary, the date of that amendment.
  • The Presentation can be all electronic records or a mixture of some paper documents and some electronic records.
  • The provisions of eUCP shall prevail to the extent that they would produce a result different from the application of the UCP.
  • It comprises of a number of terminologies used in the eUCP V2.0, some also appear in UCP 600, whilst others appear solely in the eUCP V2.0
  • The requirement for presentation of one or more originals or copies of an electronic record is satisfied by the presentation of one electronic record.
  • It provides a method by which corrupted data may be represented.
  • Banks are liable for their own data processing systems.
  • Force majeure article, as the previous versions did not include one.

UCP

Case study for ePresentation

First epresentation under eucp using bolero.

At the end of 2010 Bolero announced the first electronic presentation using the Bolero platform to perform fully electronic presentation of documents under a documentary Credit issued subject to eUCP.

The parties involved in the transaction:

  • The beneficiary BHP Australian mining company, formerly known as (BHP Billiton)
  • The applicant Tae Kyung Ind. Co. Ltd. in South Korea
  • The issuing bank Korea Exchange Bank (KEB)
  • The advising and negotiating bank, The Royal Bank of Scotland (RBS)
  • The shipping company “K” Line Pte Ltd.

The electronic documents sent via Bolero platform by the beneficiary to RBS for pre-checking then as a formal ePresentation, after approval the documents forwarded to KEB and promptly honoured.

Arthur Vonchek, CEO of Bolero said: “We are very excited about the success of the live pilot which demonstrates both the reality as well as the substantial opportunities associated with straight through document presentation.”

Mr. Yutaka Kuge, General Manager, from “K” Line Pte Ltd. said: “Electronic BOL’s provide significant benefits to all parties in the supply chain. For ship-owners specifically, the most notable advantages are a fully traceable audit trail of BOL ownership and faster turnaround of administrative processes around BOL’s by elimination of physical BOL’s getting delayed or even lost during the transfer between the various parties.”

The ePresentation replaces the need for paper documentation, thereby saving the time for all parties involved, while accelerating the working capital cycle through faster and secure payment.

UCP

  • Since its origin, more than 85 years, UCP, has governed documentary credits and is considered to be a fundamental component of international trade, as well as, addressing developments in banking, transport and insurance industries and providing great support, comprehensive and practical working assistance to bankers, lawyers, importers, exporters, transporters, academics and all the parties involved in international and domestic trade, so that revision for UCP 600 is a vital matter and will not fade away in order to keep pace with market needs and practices.
  • URR provides a framework of rules to facilitate the business of documentary credits and the bank-to-bank reimbursement, thereby saving time and costs.
  • ISBP serves as an aid to a beneficiary of a documentary credit in its creation and presentation of documents to banks, also it works as a checklist for document checkers to follow in the examination process under documentary credits.
  • eUCP provides a framework of rules when dealing in electronic documents under documentary credits and accommodates the technological developments.
  • The ICC always makes every effort to keep trade finance flowing smoothly around the world by creating standards and guidelines to avoid the confusion and conflicts between parties and continually adjust and overhaul the rules to reflect the changing nature of banking in trade.

Osama Ibrahem

About the Author

Osama Ibrahem graduated from the Faculty of Commerce, Cairo University, Egypt and has four years of experience with the National Bank of Egypt as a trade finance officer dealing specifically with letter of credits and documentary collections, he is a CDCS holder and had several courses with coastline solutions in Trade Finance and also, currently applying for CTFP from ICC Academy. He is passionate about trade finance and always trying to keep updated with the latest news and events.

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Deepesh Patel is Editorial Director at Trade Finance Global (TFG). In this role, Deepesh leads efforts in developing TFG’s brand, relationships and strategic direction in key markets, including the UK, US, Singapore, Dubai and Hong Kong.

Deepesh regularly chairs and speaks at international industry events with the WTO, BCR, Excred, TXF, The Economist and Reuters, as well as industry associations including ICC, FCI, ITFA, ICISA and BAFT.

Deepesh is the host of the ‘Trade Finance Talks’ podcast and ‘Trade Finance Talks TV’. He is co-author of ‘Blockchain for Trade: A Reality Check’ with the ICC and the WTO, alongside other industry research.

In addition to his work at TFG, Deepesh is a Strategic Advisor for WOA, and works closely with ITFA. He also sits on the Fintech Working Group of the Standardised Trust.

Prior to TFG, Deepesh worked at Travelex where he was responsible for the cards business and the Travelex Money app in Europe, NAM, UK and Brazil. Deepesh is Chair of Governors and co-opted LA Governor of the Wyvern Federation, which has responsibility for 5 primary schools in South London.

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UCP 600 - Uniform Rules and Practice for Documentary Credits - Including eUCP Version 2.1

ISBN : 978-92-842-0280-5

  • Documentary credits
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Commercial letters of credit are the lifeblood of international trade. For more than 85 years, the Uniform Customs and Practice for Documentary Credits (UCP) - the International Chamber of Commerce's rules on documentary credits - have governed letter of credit transactions worldwide. 

UCP 600 contains important new provisions in the fields of transport, insurance and compliance, which will form the basis of letter of credit transactions for years to come. 

The revised UCP includes a "Definitions" article designed to clarify the meaning of key terms, a changed practice for giving a notice of refusal and other modifications you will need to know. It also includes version 2.0 of the eUCP - the 14 articles of ICC's supplement to the UCP that govern presentation of documents in electronic form. 

Since its inception, the UCP has remained a vital component of international trade. Bankers, traders, lawyers, transporters, academics and all who deal with letter of credit transactions will refer to UCP 600 on a daily basis. 

Foreword .....  1

ICC Uniform Customs and Practice for Documentary Credits

Introduction .....  6

Article 1: Application of UCP..... 9

Article 2: Definitions..... 9

Article 3: Interpretations..... 10

Article 4: Credits v. contracts..... 10

Article 5: Documents v. goods, services or performance..... 11

Article 6: Availability, expiry date and place for presentation..... 11

Article 7: Issuing bank undertaking...... 11

Article 8: Confirming Bank Undertaking..... 12

Article 9: Advising of credits and amendments..... 12

Article 10: Amendments..... 13

Article 11: Teletransmitted and pre-advised credits and amendments..... 13

Article 12: Nomination..... 14

Article 13: Bank-to-Bank Reimbursement Arrangements..... 14

Article 14: Standard for examination of documents..... 15

Article 15: Complying presentation...... 16

Article 16: Discrepant documents, waiver and notice...... 16

Article 17: Original documents and copies..... 17

Article 18: Commercial Invoice...... 17

Article 19: Transport document covering at least two different modes of transport...... 17

Article 20: Bill of lading...... 18

Article 21: Non-negotiable sea waybill...... 19

Article 22: Charter party bill of lading...... 21

Article 23: Air transport document...... 21

Article 24: Road, rail or inland waterway transport documents..... 22

Article 25: Courier receipt, post receipt or certificate of posting..... 23

Article 26: “On deck”, “shipper’s load and count”, “said by shipper to

contain” and charges additional to freight...... 23

Article 27: Clean transport document...... 23

Article 28: Insurance document and coverage...... 24

Article 29: Extension of expiry date or last day for presentation...... 25

Article 30: Tolerance in credit amount, quantity and unit prices...... 25

Article 31: Partial drawings or shipments..... 25

Article 32: Instalment drawings or shipments...... 26

Article 33: Hours of presentation...... 26

Article 34: Disclaimer on effectiveness of documents...... 26

Article 35: Disclaimer on transmission and translation..... 26

Article 36: Force majeure..... 26

Article 37: Disclaimer for acts of an instructed party...... 26

Article 38: Transferable credits..... 27

Article 39: Assignment of proceeds..... 28

ICC Uniform Customs and Practice for Documentary Credits for Electronic Presentation

Introduction to eUCP Version 2.1.....  31

Preliminary considerations.....  33

Article e1: Scope of the Uniform Customs and Practice for Documentary

Credits (UCP 600) supplement for electronic presentations (“eUCP”)..... 34

Article e2: Relationship of the eUCP to the UCP..... 34

Article e3: Definitions..... 34

Article e4: Electronic records and paper documents v. goods, services or performance 35 Article e5: Format...... 35

Article e6: Presentation..... 36

Article e7: Examination..... 37

Article e8: Notice of refusal..... 37

Article e9: Originals and copies...... 37

Article e10: Date of issuance..... 38

Article e11: Transport...... 38

Article e12: Data corruption of an electronic record...... 38

Article e13: Additional disclaimer of liability for presentation of electronic

records under eUCP...... 38

Article e14: Force majeure..... 39

ICC Banking Commission at a glance.....  39

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assignment of proceeds under a documentary credit

Documentary Credits: Rules, Guidelines & Terminology

Over the years, the ICC Banking Commission has become a leading global rule-making body for the banking industry, not only producing universally accepted rules and guidelines for international banking practice, but also providing leading edge research and analysis.

Today, the majority of modern documentary credits are issued subject to the International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits, 2007 Revision, commonly known as UCP 600 .

In this article we will explain some of the rules and guidelines contained within the UCP 600, as well as some related terminology, to give you a clearer understanding of how a documentary credit should be written. Think of this as a jargon-busting reference guide.

Parties Involved

assignment of proceeds under a documentary credit

It is essential to be aware of the parties involved in documentary credit transactions, a brief summary of which follows:[ref]UCP 600 Article 2 Definitions[/ref]

  • Applicant: the party on whose request the credit is issued (the buyer).
  • Issuing Bank: the bank that issues a credit at the request of an applicant or on its own behalf.
  • Advising Bank: the bank that advises the credit at the request of the issuing bank.
  • Confirming Bank: the bank that adds its confirmation to a credit, in addition to that of the issuing bank, to honour or negotiate a complying presentation.
  • Nominated Bank: the bank with which the credit is available or any bank in the case it is available with any bank.
  • Beneficiary: the party in whose favour the credit is issued and normally the provider of the goods, services or performance (the seller).

UCP 600 sub-article 14 (j) states that when the addresses of the beneficiary and the applicant appear in any stipulated document, they need not be the same as those stated in the documentary credit or in any other stipulated document, but must be within the same country as the respective addresses mentioned in the documentary credit. It goes on to clarify that contact details in respect of the beneficiary’s and the applicant’s address can be disregarded. Such details would include email, telephonic and fax.

A credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary.[ref]UCP 600 Article 10[/ref]

A documentary credit has its own terms and conditions which do not rely upon the terms or performance of the sales contract. This is the principle of autonomy and relates to a documentary credit being treated as an independent transaction. The autonomy of a documentary credit has been re-confirmed in law many times over the years.

In effect, this leads to a documentary credit being considered as a primary means of payment (as opposed to a demand guarantee or standby letter of credit which is a secondary means of payment).

Clean Transport Document

assignment of proceeds under a documentary credit

It is common for documentary credits to state that the presented transport document should be ‘clean’. UCP 600, article 27 states that banks only accept clean transport documents and that such a document is one that does not expressly declare a defective condition of the goods or packaging. It was further clarified that the word ‘clean’ did not need to appear on the document.

Under ISBP 745, a transport document is not to include clauses that expressly declares a defective condition of the goods or their packaging.

Further Learning: If documentary credits are a tool you need to use regularly in your job, consider taking one of our internationally recognised trade finance courses and qualifications to bring your knowledge and skills up to ICC-endorsed, global standards. You can choose to focus specifically on documentary credits over a single course at an introductory or advanced level or earn a broader trade finance qualification like our Global Trade Certificate (introductory) or Certified Trade Finance Professional (CTFP) (advanced) that both include courses on documentary credits as part of a wider curriculum that also covers other trade finance techniques.

Complying Presentation

Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of UCP 600 and international standard banking practice. This is further expanded in UCP 600 Article 15.

assignment of proceeds under a documentary credit

As stated in ISBP 745[ref]Preliminary considerations (iv)[/ref], the applicant and beneficiary should carefully consider the documents required for presentation, by whom they are to be issued, their data content and the time frame in which they are to be presented. Only documents that are necessary (e.g. for customs clearance purposes) should be required by the credit. If feasible, it is recommended that documentary requirements be limited to an invoice and transport document.

The eUCP became effective on 31 March 2002. A revised version of eUCP (Version 2) came into force on 1 July 2019 . The principles on which the eUCP has been based are the underlying principles in the UCP and standard practice currently existing for eCommerce transactions. The eUCP focuses on the principles of electronic issuance and draws from practice in the paper world in functionally equivalent situations for electronic presentations.

Instalments

UCP 600 article 32 states that when an instalment is not drawn or shipped within the allowable period, then the credit ceases to be available for that and any subsequent instalment.

The ICC Banking Commission first approved International Standard Banking Practice (ISBP) in 2002 as ISBP 645. Subsequently, ISBP 681 was released in 2007 to bring it in line with UCP 600. Approval for ISBP 745 was given on 17 April 2013.

  • It is important to note that ISBP does not amend UCP 600. It explains how practices articulated in UCP 600 are to be applied by documentary credit practitioners.
  • ISBP and the UCP should be read in their entirety and not in isolation.[ref]ISBP 745 Preliminary Considerations i.[/ref]
  • The incorporation of ISBP into the terms of a documentary credit is deemed inappropriate, as the requirement to follow agreed practices is implicit in UCP 600.
  • The publication reflects international standard banking practice for all parties to a documentary credit.

Letter of Credit vs. Documentary Credit

Both terms are in common usage and are synonymous. There is no distinction between the two but, as ICC rules commonly refer to ‘documentary credits’[ref]In particular UCP 600 and ISBP 745[/ref], this is the term used within this guide.

Negotiation

assignment of proceeds under a documentary credit

UCP 600 sub-article 6 (b) emphasises that a credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation. All three terms can be found in UCP 600 Article 2 Definitions.

Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank. It is important to note that mere document examination does not constitute ‘negotiation’.

Nowadays, very few credits are pre-advised. UCP 600 article 11, Teletransmitted and Pre-Advised Credits and Amendments, caters for the limited number of credits that comprise of a pre-advice with a subsequent mail or telecommunication confirmation.

Reasonable time

Former versions of UCP provided for banks to have a ‘reasonable time’ to examine documents. UCP 600 sub-article 14 (b) no longer refers to a reasonable time and limits the examination period to a maximum of five banking days following the day of presentation.

According to the ‘Commentary on UCP 600’ (ICC Publication No. 680) reference to reasonable time was removed due to the lack of a standard application of the concept globally. This does not, however, mean that the principle of reasonableness has entirely disappeared. Banks still need to be reasonable in the time taken to examine documents. For example, taking five banking days to examine a presentation consisting of a relatively few number of documents may not be considered as reasonable under the applicable law.

Strict compliance

assignment of proceeds under a documentary credit

The Executive Committee of the ICC Banking Commission released an ‘Issues Paper’ containing notes on the principle of strict compliance on 24 May 2016.[ref]https://iccwbo.org/publication/icc-banking-commission-executive-committee-issues-paper_notes-on-the-principle-of-strict-compliance/[/ref] As mentioned therein, the issue of ‘strict compliance’ had continually surfaced with respect to the examination of documents presented under documentary credits. Accordingly, the paper was released in order to represent the position of the Executive Committee.

It was highlighted that ISBP, particularly the latest version ISBP 745, has made a significant impact in lessening the exactitude of the doctrine of strict compliance. In fact, it is arguable whether or not strict compliance even exists any more. A review of the General Principles section of ISBP 745 highlights numerous aspects of the document examination process that reduce the need for a literal application.

Documentary credits are governed by an international code of practice drawn up by the International Chamber of Commerce, known as Uniform Customs and Practice for Documentary Credits (UCP). These rules were originally introduced to alleviate the disparity between national and regional rules on documentary credit practice.

First published in 1933, and revised on five occasions since, the latest version is known as UCP 600. This comprises 39 Articles, which establish the requirements necessary to regulate documentary credit operations.

Refers to the ICC Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits, Publication No. 725 (URR 725), which applies to any bank-to-bank reimbursement when the text of the reimbursement authorisation expressly indicates that it is subject to these rules.

The use of a reimbursing bank is often a determining factor when a nominated bank decides to honour or negotiate. Banks that are requested to add confirmation will often prefer a reimbursing bank to be nominated in the documentary credit rather than rely on settlement being made directly by an issuing bank upon the issuing bank’s receipt of complying documents.

PRACTICAL NOTICE

  • This article is intended to be a practical complement to other training solutions and to provide guidance. You can find all ICC Academy’s online trade finance courses here.
  • There are many important regulatory restrictions and requirements as well as business considerations that this article does not cover.
  • Nothing contained herein is to be considered as the rendering of any legal or other professional advice for specific cases and readers are responsible for obtaining such advice from their own legal counsel or other professionals.

About the Author David Meynell Senior Technical Advisor, ICC Banking Commission Co-owner www.tradefinance.training  Managing Director TradeLC Advisory Tel: +44(0)7801 922359 Email: [email protected]

Further Learning

If you would like to enhance your understanding of documentary credits and trade finance further, we recommend taking our one of our internationally recognised, online trade finance certificate programmes.

Global Trade Certificate (GTC) : The GTC is our introductory trade finance certification programme which will give you a thorough and broad understanding of the various trade finance techniques and settlement methods available.

GTC Students get access to 14 individual courses covering documentary credits, guarantees, standby letters of credit, supply chain finance and much more. Once you have completed nine of the courses you will be eligible to take the final exam. If you pass you will receive an internationally recognized ICC Academy certificate, which you can use to improve your career prospects and work towards more advanced qualifications such as the CTFP.

Certified Trade Finance Professional (CTFP): The CTFP is our advanced trade finance programme intended for those with five or more years’ experience working in trade finance or those with an existing trade finance qualification from the ICC Academy or LIBF. It is designed to give you the tools to confidently sell, deliver and process global trade finance solutions and is fast becoming an industry standard for senior trade finance positions.

CTFP Students get access to 11 individual courses covering documentary credits, guarantees, standby letters of credit, supply chain finance, supply chain finance, fintechs, trade operations and much more. Once you have completed nine of the courses you will be eligible to take the final exam. If you pass you will receive an internationally recognized ICC Academy certificate, which will qualify you for more senior trade finance positions and help to fast-track your career.

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Assignment Of Letters Of Credit And Proceeds

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Documentary credit – definition, main actors, how it works

Documentary credit, not to confuse with documentary collection , is the most used payment technique in international trade. It is therefore of particular interest for trade professionals. What is a documentary credit? How does it work? Who are the main actors involved in a documentary credit process? Read on to get the answers to these questions and much more.

Definition of the documentary credit

Documentary Credit is a payment technique whereby a bank commits itself, on behalf of its client (the importer), to pay to a beneficiary (the exporter) within a fixed period, the price of goods / services against the delivery by the exporter of previously agreed and compliant documents proving the value and shipment of the goods / services.

The Documentary Credit is used when the transaction amounts are very high or when one party has doubts about the morality or solvency of the other. It provides security for both the exporter and the importer. The seller (the exporter) receives an advance assurance of payment upon presentation of documents listed in the agreement, and the buyer is assured that the bank will not pay unless the seller has submitted all the documents strictly complying with the documentary credit. The credit worthiness of the importer is substituted by the guaranty of a bank (usually his own bank).

Documentary Credit, also called a Letter of Credit, is subject to the Uniform Rules and Practices of the International Chamber of Commerce. The term “Letter of Credit” or the abbreviation “L/C” is predominantly used in the USA while Europeans prefer to use “Documentary Credit” or the abbreviation “D/C”.

There are many types of documentary credits. In its main forms, a documentary credit may be revocable or irrevocable, notified or confirmed.

  • the revocable documentary credit: It may be amended or canceled any time by the importer without the approval of the exporter. Or the importer’s bank may cancel its commitment before the goods are shipped. Given the sums generally involved, the risk for the exporter is significant (Production of goods that he will not be able to ship because the client or his bank has retracted). This explains why this form of documentray credit is almost never used in practice.
  • the irrevocable documentary credit : The bank of the importer makes a firm commitment to pay. This type of documentary credit cannot be changed or canceled without the agreement of all parties. The exporter considers the irrevocable documentary credit as an order confirmation. He can start manufacturing the goods because he is assured of being paid by the importer’s banker if he meets all his commitments.
  • the notified documentary credit :  Notifying a documentary credit is informing its beneficiary, the exporter, that it has been issued in its favor. This notification is made by a bank (called the notifying bank or advising bank) located in the exporter’s country. It may be the exporter’s bank, but it is not always the case. When the documentary credit is notified, only the banker of the importer is committed to pay. The notifying bank credits the exporter’s account after receipt of funds from the importer’s bank.
  • the confirmed documentary credit : This type of documentary credit contains a guarantee on the part of both the issuing and the notifying banks to make the payment to the seller if the terms of the documentary credit are met. Confirmation is only added to irrevocable documentary credits. The bank that gives the second guarantee is called the confirming bank. If he wants a confirmation, the applicant (the importer) must state this expressly in his documentary credit application. The confirming bank assumes the credit risk of the issuing bank as well as the political and transfer risks of the importer’s country. The confirming bank is usually the correspondent of the importer’s bank located in the country of the exporter. Without confirmation of the documentary credit, the notifying bank just forwards it to the beneficiary without taking on its own commitment.

Main actors involved in the documentary credit

The documentary credit involves in its simplest form, four main actors (Yes, the Four Corner Model again): The importer and his bank on one side and the exporter and his bank on the other side. The importer’s bank is the issuing bank. The exporter’s bank is the notifying bank. It can be the confirming bank if it confirms the Documentary Credit.

The importer

It is the buyer who gives the instructions for opening the Documentary Credit. He is the originator of the documentary credit.

The importer’s bank

It receives instructions from the importer, the client, and opens or issues the documentary credit. That is why it is called the issuing bank.

The exporter’s bank

Located in his country, it is the bank that notifies the exporter, the beneficiary, upon receipt of the documentary credit and:

  • either transmits it to him, without making any commitment. In this case, it is called the notifying bank.
  • or confirms it by agreeing to add its payment commitment to that of the issuing bank. It is then called confirming bank.

Note: The importer’s bank prefers to do business with a correspondent bank in the country of the exporter. And the exporter may not be the customer of that bank. So it is not mandatory for this bank to be the bank of the exporter.

The exporter

It is the beneficiary of the documentary credit. He is the seller in favor of whom the documentary credit is open. To receive payment, he must prove compliance with his obligations by submitting all the required documents in the documentary credit to his bank.

Issuance and notification of the documentary credit

Documentary Credit also called Letter of Credit

The steps required for opening and notifying a documentary credit are shown in the diagram above. Each step is examined in detail in the following.

1. The signature of the contract between the exporter and the importer

This step is very important for the success of the whole operation. The two parties agree the terms of the transaction in a contract: the goods, transport and shipping conditions, delivery times, documents to be provided by the buyer, the payment technique (in this case the documentary credit), the payment instrument, what to do in case of dispute (Non payment, problems with the goods, etc.).

It is strongly advised to seek the support of professionals of the international trade to avoid the many pitfalls and make a good and fair deal for all the parties. Even if forms can be used, it is not always easy to fill them out and the omission of an important point can put the whole operation in question.

It is also strongly recommended for both parties to get in touch their banks during this phase and not after the signature of the contract. Banks can provide them with valuable advice for the smooth execution of the transaction in legal, logistical and financial terms.

2. The request for the opening of a documentary credit

The importer asks his bank to open a documentary credit whose beneficiary is the exporter. Banks usually have many forms that the importer must complete and sign to formalize their application. In some cases, an opening application letter may be sufficient. If the documentary credit can refer to the contract, it is important to note that the bank is not bound by the terms of the contract. It must only follow the instructions given by the customer in the application form and nothing else.

After receipt of the request, the bank conducts a thorough examination of the client’s situation. The bank may feel that the transaction is too risky and reject the request. Otherwise, it may ask the client to make an advance deposit for the opening of the credit or give him a payment term on his usual line of credit.

3. The issue of the documentary credit

The importer’s bank issues the documentary credit in accordance with the application received from his client. When credit is irrevocable, this step puts all the mechanics in motion. The bank can no longer retract and it commits to pay the beneficiary against the delivery of the documents listed in the documentary credit.

The issuance of the documentary credit is usually done by transmission of an MT 700 message if both banks are connected to the SWIFT networks. Otherwise, it is done by encrypted telex or by mailing a standardized completed form of the International Chamber of Commerce. The sending of the MT 700 is the preferred solution because of the security and speed offered by the SWIFT network.

4. Notification of documentary credit confirmed or not

After receipt of the documentary credit, the correspondent of the importer’s bank can add its confirmation. , that is to say commit, as the issuing bank, to make the payment under the conditions defined in the documentary credit. For simplicity, we consider that the exporter’s bank is the correspondent of the importer’s bank. But it’s not always the case.

In any case (confirmation or not), the correspondent notifies the exporter that a documentary credit is opened in his favor. He hands over the original in paper format.

In the next articles, we will see what happen after the exporter receives the notification 1) from the notifying/advising bank and 2) from the confirming bank.

RELATED ARTICLES

Fundamentals of payments and payment systems, standby letter of credit: how it works, the standby letter of credit – definition, issuance and notification.

Hi, Can u please suggest a Trade finance book to understand it clearly along with ur site.. i am working on it now and want to understand in more detail

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Had a task to complete this morning on documentary credit but was hearing the term for my very first time. thanks very much

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Assignment of Proceeds

Assignment of Proceeds . It is a legal mechanism by which the beneficiary of a letter of credit may pledge the proceeds of future drawings to a third party. Assigning proceeds involves giving the letter of credit to a financial institution, which holds the letter of credit until drawn upon, along with irrevocable instructions to the financial institution to disburse proceeds,when generated, in a specified way (such as pay 40 percent of each drawing to XXX Corporation). The financial institution acknowledges the assignment to the assignee. It does not have any obligation to pay any funds to the assignee unless the letter of credit is drawn upon by the beneficiary and payment is received from the issuing or confirming financial institution. An assignment of proceeds is not an assignment or transfer of the letter of credit and the assignee acquires no rights to perform under the letter of credit in order to generate funds.

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assignment of proceeds under a documentary credit

Council of the District of Columbia logo

§ 28:5–114. Assignment of proceeds.

(a) In this section, the term “proceeds of a letter of credit” means the cash, check, accepted draft, or other item of value paid or delivered upon honor or giving of value by the issuer or any nominated person under the letter of credit. The term “proceeds of a letter of credit” does not include a beneficiary’s drawing rights or documents presented by the beneficiary.

(b) A beneficiary may assign its right to part or all of the proceeds of a letter of credit. The beneficiary may do so before presentation as a present assignment of its right to receive proceeds contingent upon its compliance with the terms and conditions of the letter of credit.

(c) An issuer or nominated person need not recognize an assignment of proceeds of a letter of credit until it consents to the assignment.

(d) An issuer or nominated person has no obligation to give or withhold its consent to an assignment of proceeds of a letter of credit, but consent may not be unreasonably withheld if the assignee possesses and exhibits the letter of credit and presentation of the letter of credit is a condition to honor.

(e) Rights of a transferee beneficiary or nominated person are independent of the beneficiary’s assignment of the proceeds of a letter of credit and are superior to the assignee’s right to the proceeds.

(f) Neither the rights recognized by this section between an assignee and an issuer, transferee beneficiary, or nominated person nor the issuer’s or nominated person’s payment of proceeds to an assignee or a third person affect the rights between the assignee and any person other than the issuer, transferee beneficiary, or nominated person. The mode of creating and perfecting a security interest in or granting an assignment of a beneficiary’s rights to proceeds is governed by Article 9 or other law. Against persons other than the issuer, transferee beneficiary, or nominated person, the rights and obligations arising upon the creation of a security interest or other assignment of a beneficiary’s right to proceeds and its perfection are governed by Article 9 or other law.

assignment of proceeds under a documentary credit

assignment of proceeds under a documentary credit

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What Is an Assignment of Proceeds?

Malcolm Tatum

An assignment of proceeds is a financial document that is used to redirect all or a portion of a currently active letter of credit from the current beneficiary to a third party beneficiary. This type of activity can only take place if the current beneficiary is willing to agree to the arrangement, and files the necessary paperwork with the institution that extends the letter of credit to allow for this redirection of proceeds. Once the institution is satisfied with the paperwork, and the principal party involved with the letter of credit continues to comply with all the terms and provisions associated with that letter of credit, the portion transferred to the third party can be drawn upon at will.

One of the benefits of an assignment of proceeds is that the principal party still retains access to any portion of the proceeds not redirected to the third party, effectively allowing both entities to make use of the same letter of credit when necessary. For example, a parent company may be the principal party but choose to assign a portion of the proceeds from the letter of credit to a subsidiary as a means of providing backup funding for some project that the subsidiary is undertaking. This effectively creates a financial cushion that the subsidiary can draw upon if needed, all under the umbrella of the parent.

An assignment of proceeds can also occur between individuals. One individual serves as the principal party in the arrangement, and may choose to designate a portion of the proceeds to two other individuals as a means of creating some sort of support mechanism for those parties. For example, a parent may secure the letter of credit and allocate a portion of the proceeds to two children who are of legal age to participate in the arrangement. As long as the original beneficiary provides the necessary paperwork to divert a portion of the proceeds to the third party beneficiary, all parties can benefit from the assignment.

While an assignment of proceeds is an excellent and straightforward way to transfer or assign a portion of proceeds to a third party, it is important to note that the principal party remains responsible for the proceeds drawn on that letter of credit. While the beneficiaries are free to repay any amount borrowed on the credit, in the event that they fail to do so the principal party is obligated to settle the debt. For this reason, care should be taken to evaluate the circumstances closely before choosing to enact an assignment of proceeds and make sure each party is aware of his or her responsibilities in terms of repayment.

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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  1. Assignment under Documentary Credits

    Although not widely used, an assignment of proceeds is a means of settling a debt or ensuring that payment is made to the correct or appropriate entity under a documentary credit or standby letter of credit. An assignment of proceeds can occur in a number of circumstances, including: between banks.

  2. Assignment of Proceeds: Meaning, Pros and Cons, Example

    An assignment of proceeds occurs when a beneficiary transfers all or part of the proceeds from a letter of credit to a third-party beneficiary. Assigning the proceeds from a letter of...

  3. Letter of Credit Transfer and Assignment of Letter of Credit Proceeds

    An assignment of letter of credit proceeds is an assignment (or transfer) of future debt payable under a letter of credit from the beneficiary to another person (ie, the assignee). It...

  4. PDF 0302030 Letters of Credit Guide

    A Letter of Credit is also commonly referred to as a Documentary Credit. There are two types of Letters of Credit: revocable and irrevocable. A revocable Letter of Credit can be revoked without the consent of the Exporter, meaning that it may be cancelled or changed up to the time the documents are presented.

  5. § 5-114. Assignment of Proceeds.

    Assignment of Proceeds. § 5-114. Assignment of Proceeds. (a) In this section, "proceeds of a letter of credit" means the cash, check, accepted draft, or other item of value paid or delivered upon honor or giving of value by the issuer or any nominated person under the letter of credit.

  6. Standby Letters of Credit

    The documentary credit specifies the documents that must accompany the presentation, such as an invoice, bill of lading and insurance certificate. ... ISP 98, like the UCC and the UCP, also distinguishes an assignment of proceeds under a credit from of the credit itself, but includes more elaborate rules than the UCP. The assignee of the ...

  7. Letter of Credit: How to prepare "draft"

    A "draft" must be issued and signed by the beneficiary of the credit and must indicate a date of issue. If the credit indicates, as a "drawee" of a draft, the Swift code of a bank, the "draft" may indicate such Swift code or the bank's full name. If the credit is available by "negotiation" with a nominated bank or "any bank ...

  8. UCP 600 Guide

    The Uniform Customs and Practice for Documentary Credits ("UCP") is the rule governing the Documentary credits. It was established by the international chamber of commerce (ICC) to mitigate the doubts caused by individual countries promoting their own national rules on documentary credit practice. The objective, since attained, was to ...

  9. URDG 758

    Transfer of guarantee and assignment of proceeds (Article 33) Partial transfers of a "transferrable" guarantee which were previously allowed are not now possible and the guarantor has the right to refuse to give effect to a request to transfer a guarantee at all unless it has expressly consented to the transfer.

  10. UCP 600

    The revised UCP includes a "Definitions" article designed to clarify the meaning of key terms, a changed practice for giving a notice of refusal and other modifications you will need to know. It also includes version 2.0 of the eUCP - the 14 articles of ICC's supplement to the UCP that govern presentation of documents in electronic form.

  11. Documentary Credits: Rules, Guidelines & Terminology

    URR 725. Refers to the ICC Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits, Publication No. 725 (URR 725), which applies to any bank-to-bank reimbursement when the text of the reimbursement authorisation expressly indicates that it is subject to these rules. The use of a reimbursing bank is often a determining factor ...

  12. PDF UCP-600: An Overview

    Issuance of Documentary Credit Determining the responsibilities of parties Handling of documents Role of Transport Industry Role of Insurance Industry Making payment

  13. Assignment Of Letters Of Credit And Proceeds

    LexisNexis (December 9, 2019, 2:57 PM EST) -- In the world of letters of credit, a sharp distinction must be drawn between outright transfer of the letter itself and a collateral assignment of proceeds payable by the issuer upon a conforming draw.

  14. Financing under Documentary Credits

    Financing under documentary credits (a.k.a. letters of credit) takes a number of forms. Whilst it is usual for many specialists dealing with trade finance to refer to "LC discounting", for...

  15. URDG 758

    Global July 7 2010. Following what most observers feel has been a successful revision of ICC's Uniform Customs and Practice for Documentary Credits ("UCP 600 ") which, has led to a significant ...

  16. FAQs on assignments in finance transactions

    legal assignment are broadly equally available to an assignee under a notified equitable assignment for value. These benefits are: a. once the debtor has received notice of an absolute assignment, it must pay or perform the assigned rights in favour of the assignee; b. notice to the debtor is capable of establishing the priority of the assignment

  17. Documentary credit

    The documentary credit involves in its simplest form, four main actors (Yes, the Four Corner Model again): The importer and his bank on one side and the exporter and his bank on the other side. The importer's bank is the issuing bank. The exporter's bank is the notifying bank. It can be the confirming bank if it confirms the Documentary Credit.

  18. Assignment of Proceeds

    Assigning proceeds involves giving the letter of credit to a financial institution, which holds the letter of credit until drawn upon, along with irrevocable instructions to the financial institution to disburse proceeds,when generated, in a specified way (such as pay 40 percent of each drawing to XXX Corporation). The financial institution ...

  19. § 28:5-114. Assignment of proceeds.

    § 28:5-114. Assignment of proceeds. (a) In this section, the term "proceeds of a letter of credit" means the cash, check, accepted draft, or other item of value paid or delivered upon honor or giving of value by the issuer or any nominated person under the letter of credit. The term "proceeds of a letter of credit" does not include a beneficiary's drawing rights or documents ...

  20. PDF Application for Acknowledgment of Assignment of Proceeds

    In the event the assignment does not apply to 100% of the proceeds of the Documentary Credit, the Customer authorizes and directs HSBC to pay to the Customer any balance of the proceeds of the Documentary Credit that remain after payment to the Assignee.

  21. What Is an Assignment of Proceeds?

    An assignment of proceeds is a financial document that is used to redirect all or a portion of a currently active letter of credit from the current beneficiary to a third party beneficiary.

  22. PDF Assignment of Proceeds Under a Documentary Credit

    ASSIGNMENT OF PROCEEDS UNDER A DOCUMENTARY CREDIT Will be filled in by the bank BCR Division / Branch / Agency _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Registration number and date _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ASSIGNMENT OF PROCEEDS UNDER A DOCUMENTARY CREDIT

  23. PDF To Date

    also acknowledge and confirm neither the assignment will be amended nor modified. Further we also keep you indemnified, safe and harmless against all claims, losses and damages that Dubai Islamic bank may at any time incur to sustain in consequences of handling this transaction (assignment) under the subject documentary credit on our behalf. .