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Corporate letters
Corporate letters of credit of credit
and their usage as an instrument
for fraud
213
Ali Polat
College of Business Administration, King Saud University,
Riyadh, Saudi Arabia

Abstract
Purpose – This paper seeks to examine the differences between traditional documentary credits and
corporate issued documentary credits and to show the effects of these differences on the application of
documentary credits within a fraud context.
Design/methodology/approach – The objective of the paper is achieved by analysis of relevant
documents of related institutions together with some examples of works done by the authors from the field.
Findings – It is found that the documentary credits issued by corporations can be a tool for financial
fraud due to lack of information in classifications and lack of experience for this product.
Practical implications – Companies dealing with international trade can benefit from the risk
involved in that type of transactions. It is also possible that a new classification can also be arranged
including corporate letters of credits.
Originality/value – The paper covers a topic which is almost untouched. As the number of documentary
credits that are issued by corporates are rare and this is not also well documented in the theory was shown
by this research. The absence of the information in theory and practice gives room to the fraudster.
Keywords Letter of credit, Documentary credit, Corporate finances, Fraud
Paper type Research paper

1. Introduction
It is almost a consensus that documentary credits are one of the most frequently used
instruments of payment in international trade. As Verkuil (1973) mentions, this
instrument has existed for more than 100 years[1]. Documentary credits provide the
exporter with an independent bank undertaking of payment. The buyer is certain that
the payment will not be made unless the seller presents documentary evidence
concerning the merchandise.
A basic concept in documentary credit practices is the idea that the banks’ payment
undertakings depend only on the timely presentation of the stipulated documents.
The parties in a letter of credit are the issuing bank and the beneficiary. The
applicant, the main instructor, and the main first party are not a part in terms of the
credit. Therefore, the credit payment obligation is undertaken by the issuing bank alone.
The Uniform Customs and Practice (UCP, 2007) for Documentary Credits drawn up
by the International Chamber of Commerce (ICC), and most recently updated in 2007
(ICC Publication No: 600), is an agreed international code in letters of credit deals.
Meanwhile, the letter of credit, itself, is a creature of national laws, even though courts Journal of Financial Crime
Vol. 19 No. 2, 2012
often refer to the UCP for guidance on interpretation and banking practice. Each national pp. 213-225
law defines the letter of credit in its own way. As Rowe (1997) indicates, historical q Emerald Group Publishing Limited
1359-0790
trading and banking practices made up the letter of credit instruments available and this DOI 10.1108/13590791211220476
JFC instrument developed before lawyers had worked out what kind of legal animal it was.
19,2 Even today, its precise legal nature is not completely fixed and static.
In the following section, some more details of this instrument will be explained[2].
To understand how deep the rabbit hole is, any related books about the documentary
credits should be reviewed. Depending on the scope of publication, some chapters in
the books may vary in size and detail. However, payment and financing techniques, the
214 contract of sale, operational aspects of letters of credit (covering presentation of
documents, time limits, nomination, advising, confirming, examination of documents,
payment mechanism, rights of recourse, reimbursement by the issuing bank, refusal of
documents, in short the context of UCP 600), issuing the credit, role and the rules of
ICC, carriage, transport documents, insurance documents and other documents are
almost included in all books to some extent.
When a journal or magazine is reviewed, again the main theme of the papers are
some discussions and applications of the above mentioned book contexts; the rules
applied are well understood by the market participants, and with regards to a specific
case, what will be the solution again is something more common. Some authors like
Rowe (1997) also give useful information about business trends for letters of credit.
The reason behind such a unique sameness is due to a very long practice of
international trade unified by ICC. Therefore, any book trying to give information
should include the unified applications in a better way, rather than the unique and
dubious issues of the instrument. To many, extending this unification is reasonable
and required for a market which needs to speak the same language, with common
terms that are used and understood everywhere. However, if any point is ignored at the
beginning, then it will be ignored in other following processes too. That is also what
this article is about. Before going further, some basic mechanisms about letters of
credit will be explained.

2. Traditional letters of credit

Over the years, banks and businesses have evolved a wide range of techniques to effect
payment and to provide credit on international transactions from simple bank
transfers in the context of open account trading to complex project financing vehicles.
However, as Rowe (1997) states, in the midst of these procedures, letters of credit
(including documentary credits and standby L/Cs) provide a pivotal means for
carrying out and securing payment on many transnational sales and other
cross-frontier deals.
This traditional practice is useful for the parties that are expected to know what the
instrument is. The fact is that when an applicant and issuer are of the same party, then
this does not accommodate “traditional letter of credit” logic. Therefore, that is not
good for the parties accustomed to that kind of transaction.

2.1 Basic definitions regarding letters of credit

Traditional letters of credit “traditionally” have been governed by UCP rules.
Therefore, any articles of UCP 600 and accompanying International Standard Banking
Practices (ISBPs) documents are the governing set of rules for letters of credit.
UCP Article 1 explains the scope and application of UCP 600 that the rules apply to
any documentary credit (including the extent to which they may be applicable, any
standby letter of credit). Hereby, in terms of the type of the credit, it is made very clear
that commercial letters of credit, or standby letters of credit, are in the scope of UCP Corporate letters
600 when the instruments are subject to these rules[3]. of credit
UCP Article 2 in its definition advises that the term “applicant” means the party on
whose request the credit is issued. Another term, “credit”, in UCP 600, means any
arrangement, however named or described, that is irrevocable and thereby constitutes
a definite undertaking of the issuing bank to honor a complying presentation. As a last
term explanation in the definition of credit, we have “issuing bank” which means the 215
bank that issues a credit at the request of an applicant or on its own behalf.
Article 2 of UCP is the “definition article” and therefore, in addition to chosen
definitions for this article, there are many other terms and their explanations in
the article. However, in the scope of this work, three much-related definitions are
specifically chosen and explained above. Article 2 of UCP clearly indicates that
the applicant is the party on whose request the credit is issued. In this definition, we
will understand that the credit is any arrangement, however named or described, that
is irrevocable and thereby constitutes a definite undertaking of the issuing bank to
honor a complying presentation. Although so far so good, one lacked term definition is
the issuing bank, which is the bank that issues a credit at the request of an applicant or
on its own behalf.
These basic and required terms are enough for the definition part in order to lay out
our point of view. However, we also need to see the types of the L/Cs for further
explanations of the non-availability of theoretical information about the corporate L/Cs
in the Documentary Credit World.

2.2 How it works: a simple process of letters of credit

MThis payment method has long and frequently been used in international trade and
sometimes in national trade. In a simple L/C transaction, the applicant (buyer) gives his
instruction to its bank (issuing bank) to issue an L/C in favor of the beneficiary (seller). The
applicant is not a party of the L/C in view of UCP 600, although it is the initiator of the
whole process by giving instruction to the issuing bank. The idea behind this is a
reasonable one: the relationship between the applicant and the issuing bank is different
from the relationship and the responsibility of the issuing bank towards the beneficiary or
confirming bank. Upon shipment, the beneficiary presents the documents to the issuing
bank, either directly or through a confirming/nominated/advising bank. The issuing bank
checks the documents to see if they comply with the L/C requirements or not. If everything
is all right, then the issuing bank pays the beneficiary and delivers the documents to the
applicant against debiting the applicant’s account with itself.
While the procedure makes the importer pay under the L/C, if and when all terms and
conditions have been satisfied, it also forces the exporter to strictly follow L/C terms and
conditions. Considering that the whole process under L/C, from issuance to payment, is
so complicated, it would not be fallacious if one would say that drafting an L/C consistent
with UCP, ISBP and other Documentary Credit Dispute Resolution Expertise (DOCDEX)
and ICC opinions is not an easy task. Rather, it is such a laborious task that one must bear
in mind the 4C rule, which is namely the completeness of documents indicated under L/C
conditions, the consistency of documents with each other, the conformity with credit
terms and a compliance with UCP.
When compared with other international payment methods, L/Cs are among the most
complicated instruments in terms of their processes. Therefore, without proper training
JFC and understanding, applying the whole L/C logic to an operation might not be possible,
19,2 and results in either the nonpayment or the non-delivery of agreed goods and services.

2.3 Literature review for types of letters of credit

In any definition of letters of credit available, the movement point for the definition is
either: local law and general understanding of the instrument, or the governing rules of
216 its own definition, i.e. UCP rules in application. Both have special emphases on the
issuing party, which is a bank.
In the letter of credit researches of one or two decades ago, it is almost impossible to
differentiate the letters of credit in so many details, like today’s classifications. It is
reasonably acceptable that this “animal of law” is not needed to be classified in so
many ways, but to be explained and discussed for a better application.
Early available texts, like Mead (1922), make fewer distinctions between the kinds
of letters of credit. Giving more details of the types of L/Cs, in his eminent and long
standing work, King (2001) explains the types of credit by also making a classification,
referencing the obligations of the banks (revocable versus irrevocable) to the method of
payment (sight, deferred, acceptance, negotiation), and to other specific features of the
credit (transferable, revolving, back-to-back, red clause[anticipatory], standby, open or
special), as well as to the manner in which the credit is issued and to other
classifications (import, export, transit credits, currency or sterling credits, etc.).
After the classification, it is also emphasized by King (2001) that the many
descriptions today have no exactness of meaning. There is no point in giving labels to
credits unless the labels are of universal application and are reasonably descriptive of
the credit to which they are attached.
Another book by Bhogal and Trivedi (2008) makes the following classification:
clean letter of credit, documentary letter of credit, circular or traveler letter of credit,
revocable letter of credit, irrevocable letter of credit, irrevocable confirmed letter of
credit, revolving letter of credit, red clause letter of credit, transferable letter of credit,
transferable credit – limitations, back-to-back letter of credit, deferred payment letter
of credit, standby letter of credit, skeleton letter of credit, omnibus letter of credit,
straight letter of credit[4].
Bishop (2004) classifies the credits as follows: revolving credit, installment credit,
red clause credit, green clause credit, the advance payment credit, transferable credit,
back-to-back credit, part payment credit. He also adds that, as a method of payment,
this instrument has no equal; it is completely flexible, versatile and accepted
universally. Although it is only a conditional guarantee, its value to an exporter, who is
facing the risks involved in trading with a foreign country, is undoubted. In essence,
the documentary credit is an undertaking given by a bank (the issuing bank) on behalf
of its customer (the applicant) to make payments to a named exporter (the beneficiary)
upon the presentation of the stipulated documents relating to the supply of goods or
services.
The main point in these types of L/C is that, in many different sources, L/Cs have
been classified in many ways. While some of them use almost the same classification,
some others add more. To some extent, the classifications have relations with UCP 600.
Others mainly depend on the market experience and giving the main specialty of L/C to
the instrument[5]. However, none of the materials I have gone through is void of
classification, like the L/Cs issued by the banks and non-banks.
 Therefore, upon checking the historical literature on this matter, there are many Corporate letters
types and names of letters of credit. While many of them are consistent with each other, of credit
there remains some inconsistency both in naming and explanations. However, no
emphasis has been recorded on the corporate letters of credit in this world of
classifications. Therefore, this concept and the consequences of its unavailability in the
letter of credit types in the general literature will be further explained below.
217
3. Corporate letters of credit
In addition to that complexity of the standard L/C applications, there is one more issue
which only a small portion of the L/C practitioners are aware of. The matter is related
with the L/Cs issued by corporate institutions. In the L/C world, there is a question
which is raised of whether an L/C may be issued and handled by a non-bank
corporation. Although the matter is somewhat marginal, the subject is becoming more
important since the world’s financial deregulation is gradually deteriorating the
barriers between different categories of business, financial organizations and
instruments.
The UCP seem to assure implicitly that letter of credit operations will be managed
solely by banks. The expressions “bank” and “banks” are used throughout the UCP
(without any definition), whenever references are made to the entities issuing,
confirming, advising, carrying out reimbursements, or otherwise servicing L/C
transactions.
On a number of occasions, the ICC’s banking commission has considered whether a
specific provision should be added to the UCP to indicate whether entities other than
banks – and if so, what entities – can act on L/C operations that are subject to the UCP.
However, the final decision has always been to do nothing.
The issue, in fact, is one that falls within the scope of national laws and government
regulations, and it has nothing whatsoever to do with the UCP. The legal and
regulatory provisions in each country (or sometimes, of each state within a federation)
establish expressly or implicitly what sorts of entities are authorized to issue letters of
credit, or otherwise service them as part of their business.
In some cases, for instance, operations of the above type may be considered to be
strictly banking transactions, and a banking law may designate the organizations to
carry out banking business. Often, this will cover both banks and a number of other
financial institutions. In other cases, there may be fewer restrictions.
The UCP, on the other hand, has no legislative or regulatory force. It is drawn up by
a private organization, and it is applied by parties who agree to use them. The ICC has
no power either to make banks apply them or to prevent non-banks from using them.
Their application depends essentially on the will of the parties to each transaction.
Accordingly, the use of the expressions “bank” and “banks” in the UCP does not
exclude this result. Rather, these can be considered as shorthand terms to refer to the
providers of L/C services.
Most of the members of the ICC’s banking commission represent traditional
banking organizations of various sorts. A major concern, when they have raised the
above issue, has no doubt been connected with the consequences on their business of
new categories of organizations entering the market for the provision of L/C facilities.
As Rowe (1997) indicates, part of this concern is a competition issue. Another aspect is
regulatory; what happens if banks have to interact with bodies that are not subject
JFC to the same types of supervision and regulation as banks, and that do not share the
19,2 same broadly common background and traditions?
One example is provided by a case reported in the ICC’s Documentary Credits
Insight (1996). According to the report, documentary credits were being issued in favor
of exporters in Hong Kong by a foreign institution that was a finance subsidiary of the
credit applicant (a large department store). The L/Cs in question were made subject to
218 UCP 500. One of the major concerns expressed by bankers in Hong Kong was that this
situation blurred the distinction between the issuing bank and the credit applicant[6].
One thing, at least, seems clear. As an international champion of free trade, the ICC
could hardly tolerate the use of the UCP as a vehicle to restrict global competition in
provision of L/C services. Not only would this be legally questionable – in particular,
in relation to anti-trust laws – but in the face of the economic forces involved, it would
also inevitably be doomed to failure.
A letter of credit, by just looking at the issuer, cannot be weighted as more risky or
less risky. After all, it is also true that non-bank issued L/Cs are not inherently riskier
than L/Cs issued by banks. Rather, it is related with the expectation of the parties and
their financial conditions (country risk, credit risk, etc.) There may be cases where a
non-bank can be more stable than a bank, and therefore, more demandable in their
instruments. A beneficiary will be aware of the difference between a non-bank issued
L/C and the corporate responsibility of L/C, so no problem will arise.
As it is indicated in Documentary Credit World (September 2005), using non-bank
issued L/C for deceptive purposes might be risky for an unwary beneficiary who
considers that what they had is an instrument issued by a bank. Discovering that the
instrument is not what they expected, and then a fraud or better, a bad will might be at
work (Figure 1).
A beneficiary in loss might seek solutions by suing the advising bank who advised
the non-bank L/C or the applicant and/or issuing party.

3.1 Definition of corporate letters of credit

Neither UCP 600 nor the former UCP series gives a specific type of definition for the
non-bank or corporate L/C. Having a good definition in any law document, training
material, or any other related book, is also not possible. Therefore, the only indirect
definition we try to accumulate comes from ICC explanations and the rules of Society
for Worldwide Interbank Financial Telecommunication (SWIFT, 2002, 2004a, b).
3.1.1 Definition of ICC. The UCP Drafting Group has made a big effort, discussing
during the UCP 600 drafting process whether the term “bank” or “party” should be
used in describing the issuer. As the final publication shows, the “bank” term has been
retained on the strength of objections by ICC national committees. However, naming
the party as a bank does not mean that non-banks cannot issue L/Cs. That is a common
practice used by large US companies with their Asian suppliers, as Kreitman (2005)
indicates. There were times when the debate regarding non-bank issuance has been
widely discussed.

Independent unidentified
Figure 1.
Issuing Non Bank MT710
Relations in a traditional Applicant
Credit Bank Issuer unidentified Advising Bank
L/C versus corporate L/C
Relation
Ninni (2006), a member of the ICC Banking Commission, claims that it is much more Corporate letters
simple to address this issue by coming up with a possible new article in the new rules, of credit
saying that an “issuing bank” can be a non-bank. This way, it would be clearer, more
logical, and does not affect the general focus of the new rules.
As the only party who cannot issue a L/C is the buyer, a L/C issued by the buyer is
not a true documentary credit at all, but rather a simple payment service under which
banks merely process the documents. Accordingly, as a matter of principle, the UCP do 219
not supply the appropriate rules for operations of this kind.
The most detailed ICC view on non-bank issues of a letter of credit has been
appraised on the official opinion of the ICC Banking Commission on 30 October 2002.
ICC concluded as follows[7]:
It does not “violate” the UCP for a non-bank to issue a credit subject to the UCP even though
such issuance is not contemplated in the rules. The UCP does not specifically provide for
bank advice of non-bank issued letters of credit. Such an advice should accurately identify the
issuer and indicate the advising bank’s limited role. If the form of advice refers to the “issuer”
as “issuing bank” or otherwise gives the impression that it is a bank, it is recommended that
the advice affirmatively disclose the non-bank status of the issuer in order to correct any
mistaken impression caused by such reference.
The consequences of insolvency are a matter for local law, whether the insolvency is that of
a bank or non-bank issuer. In either case, however, the beneficiary assumes the risk of the
creditworthiness of the issuer unless it is offset by obtaining confirmation or credit insurance.
Although ICC clearly indicates UCP 500’s position on the matter of non-bank issued
L/Cs, it is still a problem for the exporters who cannot even clearly distinguish the
differences between a bank issued L/C and non-bank issued L/C on a t message. UCP
600, again, defines the issuing bank as “the bank that issues a credit at the request of
an applicant or on its own behalf”.
Smith (2009) claims that the main threats to traditional bank letters of credit are
purchase order/open account trade and corporate L/Cs. Putting aside the ordinary
threats of these instruments, it is also possible for buyers transmitting their corporate
L/Cs through an advising bank’s system to have an unintended benefit. So a bank in
the seller’s country, receiving a SWIFT formatted MT710 message into their L/C
system, might automatically generate an advice of a L/C addressed to the beneficiary
and evidencing an issuing bank. And then, the loss of non-bank emphasis in the
instrument becomes available, allowing the fraudster to make his intentions come true.
3.1.2 Definition of SWIFT. The matter regarding non-bank issued letters of credit
and SWIFT standards was brought on the table at the Trade Finance Maintenance
Working Group meeting on 7 September 2004. At this meeting, the Working Group
concluded that the Category 7 messages may not be used to advise non-bank issued
L/Cs. Referring to ICC opinion 470/TA537rev of October 2002, and giving details of the
problems of misleading the beneficiary by standard L/C advising formats, SWIFT
concluded that the Category 7 Standards cannot comply with ICC recommendation.
Therefore, the standards may not be used to transport non-bank issued L/Cs.
Considering insufficient global use of non-bank issued L/Cs and the high cost of
implementing ICC opinion, the working group also agreed not to change the current
category of SWIFT Standards with respect to the ICC opinion. The meeting concluded,
adding the sentence, “This message may not be used to advise a non-bank issued
JFC letter of credit”, for all relevant Category 7 messages to the 2005 version of the Swift
19,2 User Handbook (SWIFT, 2005).
However, the Group overruled its earlier decision at the request of the US banking
community. As a business practice, non-bank letters of credit are used more in the US
than in any other country. Therefore, such a decision made by SWIFT will also restrict
US banks from providing a full range of trade services to their customers. The decision
220 will not only affect US banks, but it will also restrict other country banks by not
enhancing this service. As a temporary solution, a rule making clear that it is the
responsibility of the sender of the MT710 and 720 to inform the receiving bank about
the issuer’s non-bank status has been decided to come into effect[8]. Until then, the
sender should specify in free text form, in field 52D, “Issuing Bank”, whether the issuer
is a non-bank, mentioning the name and address of the non-bank issuer in field 47A,
“Additional Conditions[9].”
MT710, Advise of a Third Bank’s or a Non-Bank’s Documentary Credit together
with MT 711 in addition to an MT 710 and MT 720, Transfer of a documentary credit –
originally issued by a bank or a non-bank – to a second beneficiary together with MT
721 in addition to an MT 720 are used for non-bank issued L/Cs.
Swift Standards MT October 2007 (2007, p. 64) declares the scope of MT 710 as
follows:
This message is sent by an advising bank, which has received a documentary credit from the
issuing bank or the non-bank issuer, to the bank advising the beneficiary or another advising
bank. It is used to advise the Receiver about the terms and conditions of a documentary
credit.
Regarding its usage, the Standards also indicate many clauses of which the following
are about non-bank issuance:
.
When the documentary credit message exceeds the maximum input message
length, additional documentary credit information should be transmitted via one
or more MT 711s. Up to three MT 711s may be sent in addition to the MT 710.
.
If this message is used to advise a non-bank issued documentary credit, field 50B
must be present[10].
. The advising bank must advise a documentary credit, including all its details, in
a way that is clear and unambiguous to the beneficiary.

4. Fraud risk of non-bank letters of credit: a case

One of the biggest criticisms that standby L/C’s receive is its nature as a “free lunch”
instrument. This criticism has been quoted in Palmer (1995) as, “If bankers don’t know
that there’s no free lunch, who does? Yet the banking world has produced an
instrument that comes as close to being a free lunch as anything in the business: The
standby letter of credit”. Meanwhile, the banking industry also has produced another
animal creature in addition to the standby L/C that nobody is even aware of.
The rationale behind using the classic letters of credit is well explained and
documented; the exporter is not satisfied with the reputation of a foreign buyer, credit
reports are usually sketchy, without full information. When the buyer is a midsized
company, which is not known internationally, then this is another tackle. The risk level
and financial position of the country also might be in question. At the end, it is clear that,
through L/C, a bank substitutes its own commitment to pay for that of its customer,
that is, the buyer (Venedikian and Warfield, 2000). The final point is that a “letter of Corporate letters
credit” is a bank guarantee of the buyer. This cliché is like a rule in every L/C of credit
practitioner’s mind.
As Palmer (1999) emphasized, the promise to pay under a letter of credit and a
guarantee are only worth as much as the worth of the bank giving them. That led to the
inevitable link between trade finance as an industry and bank risk analysis in the
emerging markets. When the issuing party is not a bank then this guarantee is only 221
worth as much as the worth of the party giving it. Considering the possibility that both
issuing party and applicant are the same, deeper analysis is required.
Whether the issuing or conforming party can be a non-bank is a matter that has also
never been questioned. It may seem as though the matter is practically not applicable;
although, if a non-bank can issue the L/C, can it confirm this? However, even the
MT700 message has no different arrangement for this idea (issuing or conforming
corporation) which has no room in business practice.
Everybody classifies the L/Cs in a way that is somehow the same but not exactly the
same. As indicated, there are several different and not commonly agreed and known
definitions and classifications. The most important part of all the detailed explanations
is that all the definitions are for the bank issued letters of credit. Ignoring the sender is
not a bank but a corporate, even a part of the applicant. Since such a perception is not
available in any document by which people train themselves by these books,
documents, non-bank L/Cs are totally ignored. In this case, a foreign trade officer of the
exporter’s company would not be able to realize any difference between bank issued
and non-bank issued L/Cs. Even if he sees the difference, he will either not understand
it or underestimate it, as he has no available notion for that.
Any non-bank issuer who is also a fraudster will make the required arrangement for
his own benefit. By using the banking system, the fraudster will be able to reach the
exporter in the usual way, through the banking advice of the credit. And if the credit is
not confirmed, then many advising banks will not study this L/C as their only duty is
to check if it came through the SWIFT system (by the way, the authenticity of the
document will be provided. UCP 600, again, does not say anything about such a
difference) by also ignoring all other missing information, typing errors, details, in
short, without checking other parts of the L/C.
As it can be shown in Figure 2, the only difference between bank issued and
non-bank issued L/Cs is the availability of field 50B in the non-bank issued L/C and
52A in bank issued L/C.

5. Conclusion
Palmer (1995) indicates that “To the trade finance practitioner of the 1970s, today’s trade
financing has become a completely different industry”. Having said that in 1995, it would
be more interesting for trade finance practitioners of the 1970s to see today’s practices.
In this research, a wide range of literature on L/Cs has been reviewed. However,
much of the literature, in terms of the number of papers and also in analysis, is focused
on either daily transactional matters or general descriptions of the instruments and
their differences. As the risk management approach is such a “hot” topic, some of the
works also include the risk management points for the international trade circle. In all
of them, it is the corporate L/Cs that is the missing part.
JFC Non-Bank versus Bank Issued L/Cs by MT710 Messages
19,2 NON-BANK ISSUED L/C BY MT710 BANK ISSUED L/C BY MT710
Message Type : 710-ADVICE OF A THIRD BANK`S OR Message Type : 710- ADVICE OF A THIRD BANK`S OR
A NON-BANK`S DOC.CRED. A NON-BANK`S DOC.CRED.
Sender : BANKUS44XXX Sender : BANKTRIS
BANK BANK TR

222 Receiver
UNITED STATES
: ABCDTRISXXX Receiver
TURKEY
: ABCDTRISXXX
ISTANBUL- TURKEY ISTANBUL- TURKEY
=========================================== ===========================================
:27:Sequence of Total :27:Sequence of Total
1/1 1/1
:40B:Form of Documentary Credit :40B:Form of Documentary Credit
IRREVOCABLE IRREVOCABLE
WITHOUT OUR CONFIRMATION WITHOUT OUR CONFIRMATION
:20:Sender's Reference :20:Sender's Reference
AC15041 FZ430-75
:21:Documentary Credit Number :21:Documentary Credit Number
11/14587Z/22-T 08/123/6
:31C:Date of Issue :31C:Date of Issue
080409 080428
:40E:Applicable Rules :40E:Applicable Rules
UCP LATEST VERSION UCPURR LATEST VERSION
:31D:Date and Place of Expiry :31D:Date and Place of Expiry
080510 TURKEY 080531TURKEY
:50B:Non-Bank Issuer :52A:Issuing Bank- BIC
ABC UNION BNIAIDJAXXX
HIGHWAY BANK NIAGA, PT.– JAKARTA
USA INDONESIA
:50:Applicant :50:Applicant
TUN COMMERCIAL CONTINENTAL
ENTERPRISES, JL. INDUSTRI II
XXXXXX, XXXXXXXXX
Figure 2.
XXXXXXX INDONESIA
Non-bank versus bank
:59:Beneficiary-Name & Address :59:Beneficiary-Name & Address
issued L/Cs by MT710
POLAT COMPANY A.S POLAT COMPANY A.S
messages ISTANBUL, TURKEY ISTANBUL, TURKEY

While non-bank issuance and such credits are proper in the US, if not issued by the
beneficiary of the L/C itself, it does not mean that all non-bank L/C issuers are equal, in
the same way that not all bank issuers are equal.
There is no basis in any law or in any practice which creates a special rule favoring
non-bank issuers and non-bank operations. Although non-bank issuance will not help
to protect the reputation of the product, there will be no other choice except the special
care of banks and beneficiaries of the L/Cs.
There may be advantageous and disadvantageous sides of non-bank issued L/C’s
for related parties. Therefore, the issue needs more attention and discussion in so many
terms. The specific argument this paper indicates is that the beneficiary, who is not
aware of what he has, incurs the risk of having a weird instrument in which both the
issuer and the applicant are the same party.
When we look at the types of the L/C, the very much colored world of the L/C types
does not include any separation from the issuing party point where the issuing party is
either a bank or a non-bank. Both in the definitions and types, the non-bank issuance is Corporate letters
so often ignored that the corporate issued L/C’s are not available in any academic and of credit
popular trade finance publications. As all the training materials are based
on the available information in the books and journals, it is also highly possible that
this classification and its huge effects will be ignored in the training of the international
trade professionals.
This missing part of the big picture is just the place where the fraudster wants to be. 223
He then sets up a background scenario and follows his plan in which the payment of
the goods for sure will not be. It is also sad that none of the financial institutions in the
chain is responsible for this fraud, as they are only advising what comes to them. In
this circumstance, the Financial Instrument Fraud (FIF) is defined (Merret and Renner,
2002) as, “offering nothing for something to people who want something for nothing”.
So here we have the non-bank issued letter of credit.
The policy recommendations of this paper are that the underlying risks must be
declared everywhere. It also worth noting that the ICC should inform the trading
society by a position paper, like it did before for UCP 500.

Notes
1. In his 1973 article, if he indicates more than 100 years, then we should probably say close to
150 years, considering the time span.
2. However, any explanation included here is relevant to the topic of the article. Otherwise,
explaining the whole would not be possible as this field also has many vertical and
horizontal connections in its own processes.
3. Application of UCP Article 1, The Uniform Customs and Practice for Documentary Credits,
2007 Revision, ICC Publication no. 600 (“UCP”) are rules that apply to any documentary
credit (“credit”) (including the extent to which they may be applicable, any standby letter of
credit) when the text of the credit expressly indicates that it is subject to these rules. They are
binding on all parties thereto unless expressly modified or excluded by the credit.
4. Skeleton, Omnibus and Straight Letters of Credit are the ones that the L/C market is
completely unaware of. These words have no common understanding in today’s L/C
practices.
5. For instance, an L/C indicated as transferable does not say anything about its being
confirmed or not confirmed, or by payment or by def payment. The main reason to mention
only transferability is that the exporter needs such an L/C so that he can totally or partially
transfer the credit to secondary beneficiaries.
6. How these issues may be resolved in the future stretches not only way beyond the scope of
this article, but also far beyond the field of letters of credit, trade finance and banking in
general. It is just one particular example of a still developing worldwide business movement.
7. www.iccwbo.org/id525/index.html as of 15 June 2010.
8. “Nonbank-issued letters of credit accommodated by Swift”, posted 28 December 2004,
available at: www.swift.com/index.cfm?item_id¼ 43491
9. Non-bank issued letters of credit, posted 17 May 2005, available at: www.swift.com/index.
cfm?item_id¼ 57062
10. Either field 52a “Issuing Bank” or field 50B “Non-Bank Issuer”, but not both, must be present
(Error code(s): C06).
JFC References
19,2 Bhogal, T.S. and Trivedi, A.K. (2008), International Trade Finance A Pragmatic Approach,
Palgrave Macmillan, New York, NY.
Bishop, E. (2004), Finance of International Trade, Elsevier Butterworth-Heinemann,
Burlington, MA.
Category 7 Documentary Credits & Guarantees Swift Standards (2007), Society for Worldwide
224 Interbank Financial Telecommunication, Brussels.
Documentary Credit World (2005), “The Dark Side of Non-Bank Issuance”, Documentary Credit
World, Vol. 9 No. 8, pp. 3-4.
King, R. (2001), Gutteridge and Megrah’s Law of Bankers’ Commercial Credits, Europe
Publications, London.
Mead, C.A. (1922), “Documentary letters of credit”, Columbia Law Review, Vol. 22 No. 4,
pp. 297-331.
Merret, J. and Renner, P. (2002), Preventing Financial Instrument Fraud, ICC Commercial Crime
Services, Essex.
Ninni, C. (2006), “Some real problems with the definition of ‘bank’”, DCInsight, Vol. 12 No. 2
(Insight Interview).
Palmer, H. (1995), International Trade Finance: A Practitioner’s Guide, Euromoney Publication
PLC, London.
Palmer, H. (1999), International Trade and Pre-Export Finance: A Practitioner’s Guide,
Euromoney Institutional Investor PLC, London.
Rowe, M. (1997), Letters of Credit, 2nd ed., Euromoney Publications PLC, London.
UCP (2007), UCP 600, International Chamber of Commerce, Paris.
Venedikian, H.M. and Warfield, G. (2000), Trade Financing, Wiley, New York, NY.
Verkuil, P.R. (1973), “Bank solvency and guaranty letters of credit”, Stanford Law Review, Vol. 25
No. 5, pp. 716-39.

Web references
Kreitman, R. (2005), UCP 600: The End in Sight?, Letter of Credit Law Developments, available
at: www.jenner.com/files/tbl_s18News/RelatedDocuments147/2050/Klein_Letter_of_
Credit_Law_Developments_2006.pdf (accessed 17 June 2010).
Smith, D. (2009), “Open account trade, purchase orders & the future of letters of credit
(dc world news)”, available at: http://02da8d1.netsolhost.com/blog/?p¼45 (accessed
19 June 2010).
SWIFT (2002), “When a non bank issues a letter of credit”, Society for Worldwide Interbank
Financial Telecommunication, available at: www.iccwbo.org/id525/index.html (accessed
18 June 2010).
SWIFT (2004a), “Nonbank-issued letters of credit accommodated by SWIFT”, Society for
Worldwide Interbank Financial Telecommunication, available at: www.swift.com/index.
cfm?item_id¼43491 (accessed June 2009).
SWIFT (2004b), “Nonbank-issued letters of credit and SWIFT standards”, Society for Worldwide
Interbank Financial Telecommunication, available at: www.swift.com/index.cfm?item_
id¼43320 (accessed May 2009).
SWIFT (2005), “Nonbank-issued letters of credit”, Society for Worldwide Interbank Financial
Telecommunication, available at: www.swift.com/index.cfm?item_id¼57062 (accessed
May 2009).
Further reading Corporate letters
Mike, M. (1996), “Case studies and personal opinions from correspondents worldwide”, of credit
DCInsight, Vol. 2 No. 2.

About the author

Ali Polat graduated from the University of Istanbul, College of Political Sciences and Department
of Finance in 1997. He also completed his MA and PhD degrees at Marmara University, Institute 225
of Banking and Insurance, Istanbul, Turkey on 1999 and 2007, respectively. During his education
he also has worked for Faisal Finance, Family Finance and Turkiye Finance, of which are
interest-free banks operating in Turkey. He obtained a very good knowledge of international
trade practices and a full understanding of the international trade bank applications during his
career. In 2009, he started his new career in teaching by being a faculty member at King Saud
University in the College of Business Administration, Finance Department. Ali Polat can be
contacted at: apolat@ksu.edu.sa

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