Assignment

Opening and Operations of Back-to-

Back LC with reference to Domestic
Regulations of Bangladesh

Submitted By
Team Name: Uralpongkhi
ID Name
14 Mohammad Mushfiqur Rahman
15 Mirza Ariful Alam
19 Rifat Morshed
24 Abidur Rahman
Executive Summary ........................................................................................................................ 1
Part 1: Opening of Back-to-Back LC.............................................................................................. 2
Chapter 1: Understanding Back-to-Back LC .................................................................................. 2
Concept of Back-to-Back LC...................................................................................................... 2
Need for Back-to-Back LC in International Trade ..................................................................... 2
Role of Intermediaries and Brokers ............................................................................................ 3
Chapter 2: Process of Opening Back-to-Back LC .......................................................................... 4
Step-by-Step Process of Opening a Back-to-Back LC ............................................................... 4
Documentation Required for Opening Back-to-Back LCs ......................................................... 5
Criteria for Determining the LC Value ....................................................................................... 6
Chapter 3: Factors Influencing Back-to-Back LC Approval .......................................................... 7
Factors considered by banks in approving back-to-back LCs. ................................................... 7
Fixation of financing limits ......................................................................................................... 8
Part 2: Operations of Back-to-Back LC .......................................................................................... 9
Chapter 4: Handling Back-to-Back LC Transactions ..................................................................... 9
Operational aspects of back-to-back LCs ................................................................................... 9
Payment process against export proceeds ................................................................................... 9
Issues related to import from sister concerns ............................................................................ 10
Chapter 5: Foreign vs. Inland Back-to-Back LC .......................................................................... 10
Compare and contrast foreign and inland back-to-back LCs.................................................... 10
Differences in regulations and requirements ............................................................................ 11
Maximum usance period for foreign back-to-back LCs ........................................................... 11
Chapter 6: Important Considerations in Back-to-Back LC Operations ........................................ 11
Crucial issues ............................................................................................................................ 11
Role of credit reports and fabric specifications ........................................................................ 12
Rules and regulations for import under back-to-back LCs ....................................................... 12
Part 3: Domestic Regulations of Back-to-Back LC in Bangladesh .............................................. 13
Chapter 7: Regulatory Framework................................................................................................ 13
Overview of the regulatory framework for back-to-back LCs in Bangladesh.......................... 13
 Role of Bangladesh Bank and the National Board of Revenue ................................................ 14
Chapter 8: Compliance and Reporting .......................................................................................... 15
Compliance requirements for back-to-back LC transactions.................................................... 15
Reporting obligations to authorities and regulators .................................................................. 16
Consequences of non-compliance............................................................................................. 16
Chapter 9: Challenges and Policy Recommendations .................................................................. 17
Challenges faced in the industry ............................................................................................... 17
Recommendations to address these challenges......................................................................... 18
Importance of policy support for export trade .......................................................................... 18
Conclusion .................................................................................................................................... 19
Key findings .............................................................................................................................. 19
Significance of back-to-back LCs in Bangladesh's export-oriented industries ........................ 19
Recommendations ......................................................................................................................... 20
References ..................................................................................................................................... 21
Executive Summary

This comprehensive report explores the intricate landscape of Back-to-Back Letters of Credit
(LCs) in the context of Bangladesh's international trade regulations. The study is divided into three
distinct sections, each delving into critical aspects of this financial instrument.

In the opening section, we provide an in-depth understanding of Back-to-Back LCs, elucidating

their concept and essential role in international trade. We delve into the necessity of Back-to-Back
LCs, highlighting their pivotal role in facilitating seamless global transactions. Additionally, the
report sheds light on the significant role played by intermediaries and brokers in ensuring the
smooth functioning of these financial instruments.

The second section explores the operational intricacies of Back-to-Back LCs. It outlines the
payment process concerning export proceeds, addressing crucial issues related to imports from
sister concerns. Furthermore, it delves into a comparative analysis of foreign and inland Back-to-
Back LCs, explaining the disparities in regulations and requirements. This section underscores
vital considerations such as EDF/UPAS, raw materials approval, and pre-shipment inspection. It
also examines the role of credit reports and fabric specifications while expounding on the rules
and regulations governing imports under Back-to-Back LCs.

The final section provides a detailed overview of the domestic regulatory framework governing
Back-to-Back LCs within Bangladesh. It explains the roles of Bangladesh Bank and the National
Board of Revenue in overseeing and regulating these transactions. We also address compliance
requirements, reporting obligations to authorities, and the serious consequences of non-
compliance.

Throughout the report, we emphasize the importance of strict compliance with regulations to
ensure the legality and transparency of Back-to-Back LC transactions. Non-compliance can lead
to severe consequences, including financial losses, customs disputes, and even the loss of
eligibility to engage in international trade

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Part 1: Opening of Back-to-Back LC

Chapter 1: Understanding Back-to-Back LC

Concept of Back-to-Back LC

A Letter of Credit (LC) is a widely used financial instrument in international trade that acts as a
guarantee for sellers that they will be paid upon fulfilling certain conditions outlined in the LC. In
a Back-to-Back Letter of Credit (Back-to-Back LC), two LCs are involved Master LC and
Secondary LC. The Master LC is opened by the buyer in favor of an intermediary, usually a trader
or broker. This intermediary, in turn, uses the security provided by the Master LC to open a
Secondary LC in favor of the supplier of goods.

Essentially, a Back-to-Back LC connects the intermediary between the buyer and the final supplier,
thereby securing transactions for all parties involved. It provides the supplier with the assurance
of payment through the Secondary LC while still holding the intermediary accountable through
the Master LC. It serves as a chain linking the buyer, intermediary, and supplier in a synchronized
way to ensure smooth trade operations. Unlike traditional LCs, Back-to-Back LCs usually have
identical terms and conditions, thereby ensuring parity and alignment in trade responsibilities and
expectations.

Need for Back-to-Back LC in International Trade

In international trade, various risks exist such as payment default, delayed deliveries, and
discrepancies in the quality of goods supplied. These challenges amplify when there are
intermediaries involved, such as traders or brokers who do not manufacture the products
themselves but serve to connect buyers with suppliers. Back-to-Back LCs become necessary in
such scenarios for several reasons.

Firstly, they mitigate payment risk. An intermediary who has an LC from a buyer can confidently
open a Secondary LC for a supplier, thereby assuring both ends of the trade chain that their
payment or supply obligations will be met.

Secondly, Back-to-Back LCs allow for greater fluidity and flexibility in trade operations. Smaller
suppliers who may not have the financial standing to secure an LC on their own can be included
in a trade operation thanks to the creditworthiness of the intermediary.

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Thirdly, this instrument simplifies the trading process. By using a Back-to-Back LC, the
intermediary merely needs to substitute their own LC for that of the original buyer, making the
transaction smoother and faster for all involved.

Fourthly, the use of Back-to-Back LCs also streamlines the documentation process, as the terms
are usually identical across both the Master and Secondary LCs. This reduces errors and speeds up
transaction time.

Lastly, they are particularly beneficial for complex transactions involving multiple parties and
staged deliveries. They ensure that even if one transaction falls through, the risk is isolated and
doesn't impact the whole supply chain.

Given these advantages, Back-to-Back LCs are indispensable in modern international trade,
serving as a versatile tool that safeguards interests, optimizes operations, and enhances the overall
efficiency and reliability of cross-border transactions.

Role of Intermediaries and Brokers

Intermediaries and brokers play a pivotal role in the execution and operationalization of Back-to-
Back LCs. Primarily, they act as the connecting bridge between the buyer and the ultimate supplier.
Since they often do not have the capability to supply the goods themselves, their primary function
is to ensure that transactions between the actual buyer and supplier go smoothly.

Intermediaries are responsible for negotiating terms between both parties. They must ensure that
the terms of the Master LC are aligned with the Secondary LC to avoid any discrepancies that
could result in financial risks or delays.

Furthermore, they must possess in-depth knowledge of international trade laws, domestic
regulations, and financial instruments to draft LC terms that are legally compliant and beneficial
for all parties. Often, they are also responsible for managing complex document flows, from
shipping documents to inspection certificates, to ensure that both LCs are successfully honored.

Additionally, intermediaries often carry out due diligence on suppliers to ensure their reliability
and capability to meet contractual obligations. This vetting is crucial in reducing risk, especially
in scenarios where the supplier may be located in a different country with different legal and
business environments.

In essence, intermediaries and brokers serve as the linchpins in Back-to-Back LC transactions.

Their expertise, negotiation skills, and due diligence are essential for the successful execution of
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these complex financial arrangements, thus safeguarding the interests of both buyers and suppliers
in international trade.

Chapter 2: Process of Opening Back-to-Back LC

Step-by-Step Process of Opening a Back-to-Back LC

The process of opening a Back-to-Back LC involves several carefully orchestrated steps. Below is
an outline of this step-by-step process.

1. Initiating Trade Agreement: The first step is the negotiation and finalization of the trade
agreement between the buyer and the intermediary, and then between the intermediary and
the supplier. The terms, conditions, and other specifications are agreed upon during this
phase.
2. Opening Master LC: Once the trade agreement is in place, the buyer opens a Master LC
in favor of the intermediary. This is done through the buyer’s bank, which then forwards it
to the intermediary's bank for authentication and verification.
3. Review and Verification: The intermediary reviews the Master LC to ensure all the terms
and conditions are as agreed. This includes details like shipment dates, type and quality of
goods, payment conditions, etc.
4. Opening of Secondary LC: Upon satisfactory review of the Master LC, the intermediary
proceeds to open a Secondary LC in favor of the supplier, again through a financial
institution, usually the same bank. The terms and conditions are often identical to those of
the Master LC.
5. Verification by Supplier: The supplier then reviews the Secondary LC, ensuring that all
terms, such as the description of the goods, shipment procedures, and payment terms, are
as per the initial agreement.
6. Procurement and Shipment: After accepting the Secondary LC, the supplier initiates the
process of manufacturing or procuring the agreed-upon goods. The goods are then shipped
as per the terms outlined in the Secondary LC.
7. Documentation: Proper documentation, such as invoices, shipment documents, and
inspection certificates, must be prepared by the supplier and forwarded to the intermediary.
8. Submission to Bank: The intermediary presents these documents to the bank, aligning
them with the conditions of the Master LC. Once the bank verifies that all conditions have
been met, payment is released to the supplier through the Secondary LC.
9. Receiving Goods and Documents: The intermediary receives the goods and the associated
documents. After ensuring that the goods meet the terms of the Master LC, the documents
are forwarded to the buyer's bank for release of payment.

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 10. Payment Release: Finally, upon fulfilling all conditions and obligations as outlined in the
Master LC, the payment is released to the intermediary.

This intricate process ensures that all parties involved are aligned in their responsibilities and
expectations, thereby minimizing risks and facilitating smoother international trade operations.

Documentation Required for Opening Back-to-Back LCs

Documentation plays a crucial role in the successful operation of Back-to-Back LCs. Both the
Master LC and the Secondary LC require a series of documents to be prepared, submitted, and
verified. Below is a list of some common documents needed:

● Trade Agreement: The initial trade agreement between the buyer and the intermediary,
and between the intermediary and the supplier, is often required as a base document.
● Application Forms: Both the buyer and intermediary must fill out LC application forms
provided by their respective banks. These forms capture all essential details like amount,
tenor, description of goods, etc.
● Company Documents: This includes registration certificates, tax identification, and other
statutory documents that verify the legitimacy of the companies involved.
● Credit Report: A recent credit report may be required for both the buyer and the
intermediary to evaluate creditworthiness.
● Inspection Certificates: Documents that verify the quality of the goods, often provided
by third-party inspection agencies.
● Proforma Invoice: Detailed invoices from the supplier, capturing the description,
quantity, and price of goods, are mandatory.
● Shipping Documents: Includes Bill of Lading, packing list, and other shipment-related
documentation.
● Import/Export Licenses: Applicable licenses, often mandatory in international trade,
must be presented.
● Insurance Documents: Comprehensive insurance documents that cover the goods during
transit are often a requirement in LCs.
● Importer's Registration: Before proceeding with the Letter of Credit Authorization Form
(LCAF) or LC issuance, it is imperative to verify whether the importer is registered with
the Office of the Chief Controller of Imports and Exports (CCI&E) or exempted from such
registration as per the Importers, Exporters and Indentors (Registration) Order, 1981.
● Import Policy Order (IPO): The Import Policy Order, as stipulated by the Ministry of
Commerce in Bangladesh, serves as the guiding framework for import transactions. It
provides essential regulations and compliance standards for importers and exporters.
● Harmonized System (HS) Code: The accurate HS Code is crucial for classifying the
goods to be imported in accordance with the First Schedule of the Customs Act, 1969. The
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 correct HS Code must be quoted in the LCAF and the LC or purchase contract to ensure
compliance.
● Firm Order Confirmation: Documentary evidence confirming a firm order for the goods
to be imported should be presented before opening an LC. This ensures that the import
transaction is based on a genuine and legally binding agreement.
● Detailed Description of Goods: A comprehensive description of the goods to be imported,
along with their unit prices, must be provided in each Letter of Credit. This detailed
information is vital for customs clearance and ensuring the accuracy of the transaction.

The above documents are scrutinized thoroughly to ensure compliance with the terms of both the
Master and Secondary LCs, thus serving as a bedrock for the entire transaction.

Criteria for Determining the LC Value

The value of a back-to-back LC is determined based on specific criteria outlined in the Import
Policy Order and international trade regulations. It's essential to adhere to these criteria to ensure
that the LC accurately reflects the value of the trade transaction. Here are the key factors that
influence the determination of the LC value:

● Agreed Contract Value: The most straightforward factor is the agreed contract value
between the parties. This serves as the baseline for determining the LC value.
● Incoterms: The LC value might also depend on the Incoterms agreed upon. Whether it's
FOB, CIF, or EXW, these terms can significantly impact the final LC amount as they
determine who is responsible for additional costs like shipping and insurance.
● Interest and Charges: Some LCs might include interest charges, especially if they are
usance LCs where payment is deferred. These interest charges are often incorporated into
the LC value.
● Fluctuations in Exchange Rates: In international trade, exchange rate fluctuations can
impact the LC value. It’s not uncommon for LCs to include clauses that allow for a certain
percentage of variation in the value to account for such fluctuations.
● Creditworthiness of Parties: The financial standing of both the buyer and the
intermediary can affect the LC value. Higher creditworthiness can facilitate a larger LC
amount, given the reduced risk.
● "Time Needed (Lead Time: Import, Manufacture & Shipment)": This factor can also
influence the value of the LC. Longer lead times might require higher LC values to cover
additional costs like storage or market price fluctuations.
● Value Addition Requirements: As per certain domestic regulations, such as those laid
out by the Import Policy Order (IPO) in Bangladesh, value addition requirements could
necessitate adjustments in the LC value.

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 ● Domestic Regulatory Factors: Domestic regulations can also set guidelines on how much
value can be attributed to an LC, especially for export-oriented sectors.
● FOB Value: The LC value is typically calculated based on the Free on Board (FOB) value
of the goods specified in the related export LC or sales contract. The FOB value represents
the cost of the goods at the port of shipment.
● Deductions: Certain deductions are made from the LC value, including freight charges,
insurance costs, and applicable commissions payable by the exporter. If the freight element
is not separately specified, documentation from the shipping company or agent may be
required for verification.
● Value Addition Requirement: The Import Policy Order may stipulate a specific
percentage as the value addition requirement. This requirement is essential to ensure that
the imported goods contribute to the growth of domestic industries.
● Usance Period: Back-to-back LCs are typically opened on a usance basis with a specified
period for payment, usually not exceeding 180 days. The interest rate for the usance period
should not exceed a prescribed benchmark rate.
● Amendments and Approvals: All amendments to the master export LC should be
carefully recorded to prevent any discrepancies in obligations under the back-to-back
import LC. Opening back-to-back LCs against certain export LCs, such as those under
Barter/STA, may require prior approval from Bangladesh Bank.

By carefully considering these criteria, parties can arrive at an LC value that is aligned with the
risks and costs involved in the transaction, thereby ensuring a smoother and more secure trade
operation.

Chapter 3: Factors Influencing Back-to-Back LC

Approval

Factors considered by banks in approving back-to-back LCs.

Banks conduct a multi-dimensional analysis before approving a Back-to-Back LC. Key factors
typically include:

● Applicant's Creditworthiness: Banks assess the financial stability of the applicant

through balance sheets, income statements, and other financial metrics.
● Trade History: Past trade records, especially concerning LCs, are evaluated.
● Foreign Exchange Risk: In international trade, currency fluctuation risk is scrutinized.
● Political and Economic Risks: Stability of the countries where the buyer and supplier are
located is evaluated.

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 ● Regulatory Compliance: Adherence to domestic laws, especially in the context of
Bangladesh, such as requirements set by the Bangladesh Bank and the National Board of
Revenue, is mandatory.
● Client Background: Professional history, market reputation, any legal issues, and general
business practices are reviewed. Negative findings can significantly influence the approval
process.

Fixation of financing limits

Financing limits, often defined as the maximum amount that can be issued under a Back-to-Back
LC, are fixed using a number of considerations:

● Previous Export Performance: Banks often look at your export history for the last few
years to gauge performance. The better the performance, the higher the potential financing
limit.
● Export Targets / Export Orders in Hand: Upcoming export contracts and commitments
play a huge role in deciding the limit.
● Machinery Position & Factory Condition: The physical assets and condition of the
factory are evaluated for production capability.
● Relation with Buyer & Branch Capacity: Banks also consider the business relationship
with the buyer and whether the branch dealing with the client has the capacity to handle
large LCs.
In Bangladesh, these limits also need to align with regulations set by Bangladesh Bank, ensuring
compliance with domestic financial guidelines. The limits are often reviewed periodically by the
bank and authorities like Bangladesh Bank.

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Part 2: Operations of Back-to-Back LC

Chapter 4: Handling Back-to-Back LC Transactions

Operational aspects of back-to-back LCs

Operational handling of Back-to-Back LCs involves multiple stages. Once approved, the LC
becomes an operational entity, passing through:

● Issuance: Bank issues the LC based on the approved financing limit, ensuring compliance
with Bangladesh Bank regulations.
● Documentation: A set of required documents such as shipping documents, invoices, and
certificates are prepared.
● Tracking: The bank, often through specialized software, tracks the status of goods—both
incoming (import) and outgoing (export).
● Payment & Reimbursement: Once the goods are received, payments are facilitated
between the buyer and the seller. In Bangladesh, adherence to the Uniform Customs and
Practice for Documentary Credits (UCP 600) is expected.

Payment process against export proceeds

Payment against export proceeds follows a defined sequence:

1. Shipment: After the exporter (applicant) ships goods, a set of documents including Bill of
Lading, Packing List, and Commercial Invoice are sent to the bank.
2. Document Review: These are reviewed for compliance against the LC terms and
Bangladesh Bank's regulations.
3. Submission to Buyer’s Bank: Upon validation, documents are sent to the buyer's bank
for payment or acceptance.
4. Receiving Payment: Payment can be immediate (sight LC) or deferred (usance LC, often
on a maximum 180 days usance basis in Bangladesh).
5. Disbursement to Supplier: Once received, the payment is used to settle the supplier's
credit under the Back-to-Back LC.
6. Reporting: All transactions are reported to Bangladesh Bank and, if applicable, to the
National Board of Revenue (NBR), following strict domestic compliance regulations.

9
Issues related to import from sister concerns
When importing from sister concerns, additional scrutiny is often applied, especially in the context
of Bangladesh:

● Transfer Pricing: Authorities like Bangladesh Bank and NBR are cautious about transfer
pricing mechanisms to ensure fair trade and taxation.
● Documentation: Extra layers of validation may be required to substantiate the transactions
are legitimate and not a means of siphoning funds.
● Compliance: Special approvals may be required under domestic regulations, often leading
to delays in obtaining the Back-to-Back LCs.
● Quality Control: Since the parties are related, there might be leniency in quality checks,
raising flags for regulatory bodies.

These additional concerns necessitate thorough due diligence and often extend the lead time for
Back-to-Back LC approval and operation.

Chapter 5: Foreign vs. Inland Back-to-Back LC

Compare and contrast foreign and inland back-to-back LCs

Foreign and inland Back-to-Back LCs serve the same fundamental purpose—facilitating trade by
providing a payment guarantee. However, the nuances differ substantially, especially in the
Bangladeshi context:

● Currency: Foreign Back-to-Back LCs are generally denominated in foreign currency,

while inland LCs are in local currency.
● Regulatory Oversight: Foreign LCs come under stricter surveillance from authorities like
Bangladesh Bank and may require additional documentation and compliance checks.
● Usance Period: For foreign Back-to-Back LCs, the maximum usance period is often up to
180 days. Inland LCs might have different terms, depending on the agreement between
parties.
● Interest Rates: Foreign Back-to-Back LCs are often subject to international rates like
SOFR plus a markup, whereas inland LCs might be benchmarked to domestic interest rates.
● Parties Involved: Foreign LCs often involve more parties including foreign banks,
consulates, and inspection agencies. Inland LCs are relatively straightforward, involving
fewer intermediaries.

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 ● Risks: Foreign LCs carry additional risks like currency fluctuation and geopolitical issues,
which are less prevalent in inland transactions.
● Flexibility: Inland LCs offer more flexibility in terms of documentation and compliance,
being under a single jurisdiction.

Differences in regulations and requirements

● Approval Authority: Foreign Back-to-Back LCs often require approval from higher
regulatory echelons like Bangladesh Bank, and sometimes even the Ministry of Commerce
for certain types of goods.
● Documentation: Foreign LCs require more robust documentation, including but not
limited to, Bills of Lading, Certificates of Origin, and sometimes even consular
legalization.
● Bond Licenses: Both foreign and inland LCs in Bangladesh require Bond Licenses, but
the criteria might differ. For instance, inland Back-to-Back LCs may require a Bond
License even for the local manufacturer-cum-supplier operating under a Bonded
Warehouse system.
● Compliance Reports: The level of compliance reporting to authorities like NBR is more
stringent for foreign LCs given the cross-border element involved.

Maximum usance period for foreign back-to-back LCs

In the context of Bangladesh, foreign Back-to-Back LCs generally have a maximum usance period
of up to 180 days. This is in line with international trade practices and local regulations imposed
by Bangladesh Bank. The usance interest for these LCs is also capped and should not exceed SOFR
plus 3.50%, providing a benchmark for cost-effectiveness in these transactions.

Chapter 6: Important Considerations in Back-to-Back

LC Operations

Crucial issues
● EDF/UPAS: Export Development Fund (EDF) and Usance Payable at Sight (UPAS) are
financial instruments that may be provided for Sight Back-to-Back payment. These

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 mechanisms aid exporters in financing their operations while waiting for the proceeds from
their exports.
● Raw Materials Approval: Raw materials and packing materials have to be approved
under the Utilization Declaration (UD) issued by Bangladesh Garment Manufacturers and
Exporters Association (BGMEA). This is a crucial step for initiating a Back-to-Back LC.
● Pre-shipment Inspection: This often happens at the cost of the buyer, as per Import Policy
Order (IPO). Failure to pass the inspection can lead to non-payment under the LC, posing
significant risks for exporters.

Role of credit reports and fabric specifications

● Buyer’s Credit Report: The creditworthiness of the buyer often plays a crucial role in
approving a Back-to-Back LC. Banks in Bangladesh typically require a credit report to
evaluate the risk involved in the transaction.
● BB Suppliers' Credit Report: When dealing with foreign Back-to-Back LCs, supplier
credit reports are also crucial. These can provide insights into the supplier's capacity to
meet the requirements of the contract.
● Fabric Specifications: Particularly important in the garment industry, specifics like fabric
length must adhere to certain rules. For instance, fabrics of 18.29 meters or above must be
uncut except for grey fabrics.

Rules and regulations for import under back-to-back LCs

● Bond License: Inland Back-to-Back LCs also require a Bond License. Failure to have a
valid Bond License can result in the transaction being invalidated.
● Goods Shipment Prior to LC Opening: Importers should be cautious that goods may be
shipped prior to opening the Back-to-Back LC. This increases the risks, especially if there
are discrepancies in the documents later.
● Value Addition Requirement: As per Import Policy Order (IPO), the admissible
percentage of Back-to-Back LC must be calculated considering various factors such as L/C
Value, Freight, Insurance, Commission, and value addition requirements.
● Staple Pins: As per Bangladeshi regulations, staple pins are not allowed under Back-to-
Back LCs, which is particularly important for garment imports.
● Illegal Disposal of Stocks: Any illegal disposal of stocks has to be reported to the
concerned Commissioner of Customs and National Board of Revenue (NBR). Failure to
do so can result in severe penalties.

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Part 3: Domestic Regulations of Back-to-Back LC in
Bangladesh

Chapter 7: Regulatory Framework

In the context of international trade and the intricate process of back-to-back Letter of Credit (LC)
transactions, it is paramount to comprehend the regulatory framework that governs these
operations in Bangladesh. This chapter offers a comprehensive overview of the regulatory
framework, elucidating the roles played by prominent authorities such as Bangladesh Bank and
the National Board of Revenue (NBR).

Overview of the regulatory framework for back-to-back LCs in

Bangladesh
The regulatory landscape for back-to-back Letters of Credit (LCs) in Bangladesh is governed by a
mosaic of legal instruments and administrative bodies. The primary legislative acts are the Foreign
Exchange Regulation Act of 1947 and the Import and Export Control Act of 1950. These Acts
outline the broad parameters within which foreign trade, including the use of LCs, can be
conducted.

Furthermore, the Import Policy Order (IPO) and Export Policy Order (EPO), issued by the
Ministry of Commerce, provide detailed procedural guidelines. IPO and EPO are published in
every 3 years, and the current version is 2021-2024. They outline what can be imported and
exported, under what conditions, and using what kinds of financial instruments, including LCs. In
particular, they prescribe the value addition requirements, foreign currency remittance norms, and
utilization declaration (UD) for raw materials.

Moreover, the Uniform Customs and Practice for Documentary Credits (UCP 600), a publication
by the International Chamber of Commerce, serves as an international standard that is widely
accepted in Bangladesh for LC operations. Financial institutions in Bangladesh often refer to UCP
600 for best practices in LC management, and it is integrated into the local legal context via
endorsement by the Bangladesh Bank.

Lastly, FE Circulars: Bangladesh Bank issues Foreign Exchange Circulars (FE Circulars),
providing detailed guidelines for opening back-to-back LCs, including requirements for foreign
exchange clearance and other operational modalities.

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Customs Act, 1969: The Act has provisions that regulate the clearance of goods imported under
back-to-back LCs, including the value and quality assessment of imported goods.

VAT Act and Rules: The Value Added Tax and Supplementary Duty Act of 2012 and subsequent
rules set forth how VAT will be applied on imports and exports, including transactions under back-
to-back LCs.

Income Tax Ordinance, 1984: This ordinance has specific provisions related to income from
exports and imports, affecting parties involved in back-to-back LC transactions.

Role of Bangladesh Bank and the National Board of Revenue

Bangladesh Bank: As the central bank of Bangladesh, Bangladesh Bank plays a pivotal role in
regulating back-to-back LCs. It is responsible for issuing FE Circulars, which provide the
procedural framework for how these LCs are to be handled. Bangladesh Bank is also tasked with
monitoring foreign exchange transactions and approving foreign exchange outflows under the
back-to-back LCs. The bank’s responsibilities extend to ensuring compliance with the Foreign
Exchange Regulation Act and Anti-Money Laundering (AML) provisions.

National Board of Revenue (NBR): The NBR, under the Ministry of Finance, is the apex authority
for tax policies and customs duty in Bangladesh. In the context of back-to-back LCs, NBR is
responsible for the assessment and collection of custom duties, VAT, and other forms of taxes. It
provides guidelines on how valuation should be done for goods imported under back-to-back LCs.
The NBR also enforces compliance with the Customs Act and the VAT Act and Rules, ensuring
proper reporting and payment of all due duties and taxes.

The coordinated efforts of Bangladesh Bank and the National Board of Revenue ensure that back-
to-back LCs in Bangladesh operate smoothly and in compliance with the laws of the country.

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Chapter 8: Compliance and Reporting

Compliance requirements for back-to-back LC transactions

In Bangladesh, back-to-back LC transactions are governed by a maze of rules, circulars, and
statutory provisions that dictate the way these financial instruments are to be used. The compliance
requirements can be broadly categorized under the following:

● Documentary Requirements: This includes having all the mandatory documents like the
Invoice, Transport Document, Insurance Document, etc., as specified in the Foreign
Exchange Circulars and the Import Policy Order.
● Currency and Exchange Rate: The currency in which the transaction is to be conducted
and the exchange rate to be applied should be compliant with the guidelines laid down by
Bangladesh Bank. Transactions involving more than a specified amount, usually USD 5
million, need special approval.
● Time Limit: As per Bangladesh Bank guidelines, all import transactions under back-to-
back LCs must be completed within a specific period, generally 180 days from the date of
shipment.
● Pre-shipment Inspection: Import Policy Order mandates that a pre-shipment inspection
be carried out by recognized agencies for certain categories of goods.
● Bank Approval and Credit Assessment: A thorough credit assessment and due diligence
process must be conducted by the banks before opening a back-to-back LC. This involves
assessing the creditworthiness of the applicant, the reliability of the supplier, and various
other risk factors.
● Regulatory Approvals: Special regulatory approvals might be needed for certain types of
goods or for transactions that exceed certain limits.
● Tax Compliance: NBR guidelines dictate that all import transactions should be compliant
with the VAT Act and Rules, and applicable customs duties should be paid before the
clearance of goods.
● AML and CTF: Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF)
guidelines should also be followed. This includes reporting suspicious transactions to
Bangladesh Bank.

Back-to-back LC transactions, like all financial dealings, demand meticulous compliance with
regulatory standards and guidelines. Importers, exporters, and financial institutions involved must
adhere to these requirements to mitigate risks and uphold the integrity of the trade process.

One of the foremost compliance requirements is the registration of importers with the Office of
the Chief Controller of Imports and Exports (CCI&E) as mandated by the Importers, Exporters,

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and Indentors (Registration) Order, 1981. This registration ensures the legitimacy of importers and
their eligibility to partake in international trade. Additionally, importers must correctly classify
goods using the Harmonized System (HS) Code as per the Customs Act, 1969, and the First
Schedule. The precise determination of HS Codes is vital for customs clearance and adherence to
import regulations.

Moreover, financial institutions, acting as intermediaries in back-to-back LC transactions, are

subject to stringent compliance obligations. They must abide by the regulations set forth by
Bangladesh Bank, the apex regulatory authority for banking and finance. This includes ensuring
that LC transactions align with international best practices and that foreign currency transactions
adhere to foreign exchange control policies and guidelines. Importantly, adherence to the
prescribed value addition requirement is paramount to promote domestic value addition through
imports.

Reporting obligations to authorities and regulators

● Transaction Reports: All transactions related to back-to-back LCs should be reported to
Bangladesh Bank via designated forms and online portals. Failure to do so can result in
punitive action.
● Customs Declaration: A Customs Declaration, along with all relevant documents, should
be submitted to the Customs Authority under the National Board of Revenue.
● Foreign Exchange Reports: Bangladesh Bank requires all transactions involving foreign
exchange to be reported. This includes both inflow and outflow of foreign exchange under
back-to-back LCs.
● Tax Reports: VAT and customs duties should be calculated as per NBR guidelines and
reported via monthly or annual returns.
● AML and CTF Reporting: Suspicious transactions should be reported to the Financial
Intelligence Unit (FIU) of Bangladesh Bank in accordance with AML/CTF guidelines.

Consequences of non-compliance
Non-compliance with the regulations can have severe consequences, both legal and financial.

● Fines and Penalties: Both Bangladesh Bank and NBR can levy heavy fines for non-
compliance, which can range from a few thousand to millions of Bangladeshi Taka.
● Legal Consequences: Severe violations can even attract criminal charges, resulting in
imprisonment. The term of imprisonment can range from a few months to several years,
depending on the severity of the violation.

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 ● Revocation of Licenses: Businesses found in violation may have their Importer and
Exporter Code (IEC) revoked by the Ministry of Commerce.
● Credit Score: Non-compliance can severely affect the credit score and creditworthiness
of the entity, making it difficult to secure future financing.
● Operational Disruptions: Non-compliance may result in the freezing of bank accounts or
seizing of goods, disrupting the normal business operations.

Chapter 9: Challenges and Policy Recommendations

Challenges faced in the industry

Back-to-back LC operations in Bangladesh are fraught with challenges that act as roadblocks to
smoother and more efficient trade. One such issue is the complication arising out of stock lots.
Traders often end up with surplus stock lots which they can't get rid of easily due to seasonal
demand fluctuations or non-compliance with quality requirements. These stock lots not only block
valuable working capital but also create warehousing issues. This is particularly problematic for
Small and Medium-sized Enterprises (SMEs) who operate on thin margins and may not have the
financial flexibility to deal with such challenges.

Tax issues are another significant challenge. The complex nature of the National Board of
Revenue's (NBR) tax regulations and customs duties can be confusing and daunting for businesses.
They often find themselves embroiled in red tape, thus delaying shipments and payments.
Additionally, the unclear guidelines about Value Added Tax (VAT) on import and export
transactions further complicate the matter, causing financial uncertainties for traders.

The exchange rate fluctuation is a challenge that cannot be ignored. With the taka's value subject
to frequent changes, businesses involved in back-to-back LC operations struggle with currency
risks. This is a critical issue for an export-driven economy like Bangladesh where a vast majority
of transactions are dollar-denominated.

Beyond these, issues like lack of access to credit, particularly for SMEs, and the absence of
advanced technological platforms for transaction tracking further exacerbate the operational
difficulties. Importers and exporters also face stringent documentation requirements, which can be
particularly onerous given the lack of digitization in many regulatory processes.

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Recommendations to address these challenges
To overcome the challenges associated with back-to-back LC operations, a multidimensional
policy approach is essential. First and foremost, a more straightforward and transparent taxation
regime should be put in place by the NBR. Clear guidelines on VAT, customs duties, and other
levies are essential for businesses to plan their finances better.

There is also a need for establishing a centralized digital platform that can act as a one-stop-shop
for all documentation requirements related to back-to-back LC operations. This would be a crucial
step in reducing the bureaucratic hurdles currently plaguing the system.

For dealing with the issue of stock lots, a commodities exchange could be created where businesses
can trade these lots. Such an exchange would allow for greater liquidity and could potentially
unblock the millions of taka tied up in unsold stocks.

Regarding credit access, particularly for SMEs, Bangladesh Bank should consider relaxing some
of the more stringent credit rating requirements for back-to-back LC approval. Offering low-
interest credit lines targeted towards export-oriented sectors could greatly help in this aspect.

Finally, policy measures should be put in place to mitigate the impact of exchange rate fluctuations.
Bangladesh Bank could establish a mechanism for providing forward contracts to businesses
dealing in significant foreign exchange to help them hedge against currency risks.

Importance of policy support for export trade

Policy support is of critical importance for the export trade, especially in a developing country like
Bangladesh where the export sector is one of the primary drivers of economic growth. Favorable
policies act as catalysts that can amplify the rate of export, thus earning valuable foreign exchange
for the country. Export-oriented industries like garments, leather, and seafood contribute
significantly to the GDP and employment in Bangladesh.

Government policies can make or break these industries. For example, a simplified tax regime can
go a long way in boosting investor confidence and attracting foreign direct investment. Similarly,
easy access to credit can provide the much-needed capital to businesses for expanding their
operations, hence increasing the export volumes.

In the context of back-to-back LCs, the policies of regulatory bodies like Bangladesh Bank and
the NBR can have a profound impact. Clear guidelines, simplified documentation processes, and
streamlined reporting obligations can significantly reduce the operational hassles involved in back-

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to-back LC transactions. When these aspects are adequately managed, businesses find it easier to
comply with the norms, thereby contributing positively to the export trade and, by extension, the
national economy.

Conclusion

Key findings
The report has taken an in-depth look at the multifaceted world of back-to-back Letter of Credit
(LC) operations in Bangladesh, beginning with the understanding of what back-to-back LCs are
and why they are critical for international trade. These instruments act as financial guarantees,
aiding the liquidity and credibility of transactions, often involving multiple parties such as
exporters, importers, intermediaries, and banks.

We found that the process of opening a back-to-back LC is complex, requiring an array of

documents like proforma invoices, import permits, and export contracts. Regulatory bodies like
Bangladesh Bank and the National Board of Revenue (NBR) set out strict criteria, including a
thorough evaluation of the client's background, the performance of the buyer, and branch
inspections. The report further discussed the various types of back-to-back LCs, specifically
distinguishing between foreign and inland LCs, each having its regulations, requirements, and
maximum usance periods.

Several challenges impact the efficiency of back-to-back LC operations in Bangladesh. The issues
range from stock lots, tax-related complexities, exchange rate fluctuations, to limitations in credit
access for SMEs. Moreover, compliance requirements and reporting obligations add layers of
complexity, exposing businesses to legal risks in cases of non-compliance.

Significance of back-to-back LCs in Bangladesh's export-oriented

industries
Back-to-back LCs hold paramount importance in Bangladesh's export-oriented industries like
garments, jute, and seafood. These financial instruments offer a secure way to engage in global
trade, reducing the risks associated with international transactions. Given Bangladesh's increasing
prominence in the global export landscape, back-to-back LCs are more relevant than ever. They
act as a lifeline for small and large businesses alike, providing the necessary financial cushion and
credibility to negotiate better terms with overseas partners. Authorities like Bangladesh Bank have
a role in facilitating these operations, affecting not just individual businesses but the country's
economic prospects.
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Recommendations
For Exporters: It's imperative to get well-acquainted with both local and international regulations
governing back-to-back LCs. Additionally, keeping meticulous records of all transactions and
complying with all documentation requirements can significantly speed up the process and prevent
legal complications.

For Banks: Financial institutions should consider modernizing their LC operations by adopting
digital platforms, which would significantly reduce processing times. Moreover, specific training
programs for bank personnel involved in back-to-back LC operations can lead to a better
understanding of the practical challenges exporters face, thus facilitating smoother transactions.

For Regulatory Bodies: Both Bangladesh Bank and the NBR should work on simplifying the
complex tax and customs rules, possibly by issuing clear and straightforward guidelines.
Simplification in these areas will significantly reduce the operational burden on businesses
engaged in export and will attract more firms into the export sector.

Both exporters and banks would benefit from a centralized digital platform for LC management,
as recommended. This platform should have the endorsement and active involvement of regulatory
bodies, ensuring that it meets all compliance requirements while providing real-time updates on
LC statuses to all stakeholders. This could be a transformative change in how back-to-back LCs
are managed in Bangladesh, enhancing transparency and efficiency in a sector crucial for the
nation's economic growth.

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