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International Trade Finance

Analysis on Risks of Standby L/C in International Trade

Instructor: Ms Nguyen Thi Thanh Phuong

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Group 2
1. Duong Thuy Dung
2. Vu Luong Duyen
3. Nguyen Thi Thanh Thao
4. Le Khanh Ngoc
5. Nguyen Hong Hanh
6. Nguyen Thu Trang
7. Nguyen Mai Linh
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OUTLINE

I. STANDBY LETTER OF CREDIT

II. CASE STUDY

III. SITUATION IN VIETNAM

IV. RECOMMENDATION
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I. STANDBY LETTER OF CREDIT

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I. STANDBY LETTER OF CREDIT

DEFINITION

According to ISP98, Article 1:

"A standby L/C is an irrevocable, independent, documentary and
binding agreement issued by an issuer to a third-party beneficiary"
(ISP98, 1999, Article 1.06).
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I. STANDBY LETTER OF CREDIT

A STANDBY L/C vs. A STANDARD L/C

A standby L/C and a standard L/C have a lot of things in common.

WHAT ARE THE DIFFERENCES?

- Standby L/C are second payment options. They act as a guarantee and
will only be utilized when another primary payment will not work
- While commercial letter of credits are primary payment methods.
Payment will be made right after the applicant finish his obligations.
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I. STANDBY LETTER OF CREDIT

CLASSIFICATION

1. Performance standby L/C

Classified 2. Advance payment standby L/C
by objects 3. Bidbond/ Tender bond standby L/C
that are 4. Counter standby L/C
covered 5. Financial standby L/C
6. Direct – pay standby L/C
7. Insurance standby L/C
8. Commercial standby L/C
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I. STANDBY LETTER OF CREDIT

CLASSIFICATION

Classified
by events 1. Financial standby L/C
that cause 2. Performance standby L/C
coverage
I. STANDBY LETTER OF CREDIT 9

RISKS

Risks for applicants

Risks for beneficiaries

Risks for banks

 RISKS FOR APPLICANTS
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 Force Majeure risks

Force majeure risks are unexpected events unpredictably occurring when the parties in the
transaction cannot fulfill their obligations as said in the contract.
 Abuse, fraud and deceit risks
Because standby letter of credit, by nature, functions independently with the performance
of the contract and its features benefit for the beneficiary, risks of abuse, fraud and deceit can
exist.
 Abuse risks
Beneficiary takes advantage of the gap and lack of coherence in standby letter of credit to claim for
payment while the applicant still performs his or her duties well or violates but the violations are minor.
 Fraud risks
In transactions applying standby L/C, simple and subjective presentation documents created by
beneficiaries who can intentionally make forge documents or alter documents to submit payment request
can create fraudulent risks to the applicant.
 Deceit risks
The applicant in standby L/C transaction may be deceived when the partner sets up a non-existent
company to sign the contract and ask the applicant to open a standby L/C for them to enjoy.
 RISKS FOR BENEFICIARIES
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 Non-payment risks due to not considering the terms of standby L/C

Beneficiaries who make payment requests do not rely on the terms of the standby L/C but rely
on their own assessment of the applicant's violation.

 Non-payment risks due to late presence of documents

The issue of validity of standby L/C is not determined properly because it is also affected by the
duration of the service of the applicant in the original contract, time for preparation of documents
and transfer of documents from the designated place to present.
 RISKS FOR BANKS
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 Force Majeure risk

According to UCP 600, the liability of banks issuing in case of force majeure is stipulated in
Article 36: “A bank assumes no liability or responsibility for the consequences arising out of the
interruption of its business by Acts of God, riots, civil commotions, insurrections, wars, acts of
terrorism, or by any strikes or lockouts or any other causes beyond its control. A bank will not, upon
resumption of its business, honor or negotiate under credit that expired during such interruption of
its business.”
 Risks in checking payment documents
Issuing bank reviews the payment documents to detect errors, inappropriate points of
documents related to content of standby L/C. This is considered a quite risky stage for the bank and
may even affect applicants because the documents required to present are quite simple and
subjective to beneficiaries.
 Risk of non-payment by the applicant
The bank may bear a risk of failing to claim money from the applicant as a result of the inability
to pay or bankruptcy. This is the most damaging risk for banks.
I. STANDBY LETTER OF CREDIT 13

RECOMMENDATIONS TO AVOID RISKS

Recommendations for applicants

Recommendations for beneficiaries

Recommendations for banks

 RECOMMENDATIONS FOR APPLICANT 14

Fraud and
Deceit
Force majeure Abuse
The beneficiary is
The applicant deliberate in
Force majeure as
should be careful making the forged
stated in the
when signing the documents or
previous part is
contract with alter documents
prevented by all
partners about for payment. In
parties if they
whom they are in this case the
specify them in the
lack of applicant should
contract.
information. be careful in the
beginning step of
applying for a
Standby L/C.
 RECOMMENDATION FOR BENEFICIARIES 15

Non-payment
Lack of careful Non-payment risks due to
assessment of risks due to late presence
partners not of documents
considering
The beneficiary the terms of The beneficiary
should assess the standby L/C should be aware
legal status of of the time of
partners and Furthermore, the contract
financial capacity beneficiary also performance, the
of the issuer to has to notice that limit time for
provide credit the issue to be preparation and
guarantee with a paid must not only transferring
reserve by the be regulated by the documents to the
Standby L/C to original contract issuing bank and
avoid being but also by the the estimated
deceived. Standby L/C. time to correct the
documents
 RECOMMENDATIONS FOR BANKS
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On opening
and examining Non-payment
the Standby by the
Force majeure L/C applicant
- In the
Banks must state distribution The cause may be
clearly in Standby stage, the bank due to the
L/C what the should evaluate careless
criteria for the financial examination at the
determining an viability of time of opening a
event of force customers led Standby L/C or
majeure are in to incur even with
order to avoid a compensation thorough
dispute between payments for assessment but
the parties and beneficiaries. lack of
prevent the - In the payment information about
potential risk for process, the the financial
themselves. bank need to situation of the
check all client. The bank
documents should be aware
carefully. of this issue.
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II. CASE STUDY

 II. CASE STUDY 18

CASE STUDY 1

Indochina Company (in Vietnam) has signed an import contract with Company A in
New York. This company requires Lien Viet Bank to issue 1 irrevocable letter of credit to
the favor of A. Lien Viet Bank through its correspondent bank in New York, inform
company A about the standby L/C.

The standby L/C requires the following documents:

- Bill of exchange for immediate delivery of money from Lien Viet Bank
- Copies of unpaid invoices
- Certification certified by an authorized representative of company A that the attached
invoices have expired 30 days after the required payment deadline.
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CASE STUDY 1

Five days before the standby L/C expired, Indochina company informed Lien Viet
bank that there were no unpaid bills, so Lien Viet Bank would not have to pay any
payment requests of the standby credit.

1 day before the standby L/C expired, the correspondent bank in New York, sent Lien
Viet Bank the following documents:
- Bill of exchange for immediate delivery of money from Lien Viet Bank
- A copy of the unpaid invoice, not dated but clearly stating the delivery date within 15
days before presentation
- Certificate of violation according to standby L/C.
 II. CASE STUDY 20

CASE STUDY 1

The Issuing bank, after checking the documents, paid for Company A by crediting to
the correspondent bank’s account and debiting the account of Indochina Company.

Indochina Company objected to debiting its account even though they had received
the goods. They said that Lien Viet Bank had been informed in advance that no bills were
unpaid so the bank should not have paid any payment requests. Indochina said that even
though they paid late, the payment date did not pass 30 days after the required payment
deadline.

Did the bank do right or wrong?

 II. CASE STUDY 21

CASE STUDY 2

Exporter A in Viet Nam signed an exporting contract of craft furniture with XYZ
company in America; the value of the contract is 20,000 USD. Proposing that the applicable
law is United Nation Convention On Contracts for The International Sale of Goods 1980
(UNCC 1980).

To get money for purchasing materials, Party A required XYZ to make an advance
payment of 7,000 USD. XYZ agreed with this requirement, but XYZ also required exporter A
opening a Standby L/C for this advance payment. The Standby L/C is taken under the rules
of ISP 98.
Exporter A submitted the application to open a Standby L/C at Vietcombank Hanoi
branch in Viet Nam. The delivery date stated must not exceed 18th January 2015. After
considering this application, Vietcombank opened a standby L/C valuing 7,000 USD for
exporter A.
 II. CASE STUDY 22

CASE STUDY 2

Vietcombank sent this L/C to the branch of Viettinbank in USA to notice XYZ.
After receiving the notice and accepting the above L/C as well XYZ company
transferred 7,000 USD for exporter A. On 15th January 2015, exporter A encountered a fire
accident of the warehouse and ¼ of consignment was burnt, exporter A made again ¼
consignment hurrily and finished the goods in the afternoon of 18th January 2015.
However, the inspection process for goods at port was so slow that the goods could not
be loaded on the board until the morning of 19th January and the Bill of Lading (B/L) was
marked “Ship on board” on 19th January 2015.
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CASE STUDY 2

Because of 1-day late delivery, XYZ’s partner cancelled the contract and required XYZ
to reimburse them. XYZ then presented a set of document and B/L to Viettinbank in USA
to claim that exporter A was not in comply with the contract. After inspecting the set of
documents, Viettinbank in USA transferred this set of document to Vietcombank in Viet
Nam for checking and making the above payment. Vietcombank in Viet Nam checked and
paid money for XYZ company.
After that, Vietcombank sent the notice for exporter A and required exporter A to
make payment, but exporter A refused to pay for Vietcombank because of Force Majeure
event beyond control.
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III. SITUATION IN VIETNAM

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III. SITUATION IN VIETNAM

- Has appeared in the list of products and services offered by branches of banks in the
world locating in Vietnam such as Vietcombank, Eximbank, and ACB

- However, not been popularly paid much attention and promoted by majority of banks
in Vietnam
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IV. RECOMMENDATION
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IV. RECOMMENDATION

• Update the law and regulations.

• The corporates need to be more active in getting used to using modern
method of payment like standby L/C.
• The banks need to invest more in educating their human resources.
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THANKS FOR LISTENING!