What is the procedure by the beneficiary banks (not a negotiating bank) if there is a restricted Letter of Credit (LC)?

The bank could tell the beneficiary to present documents to the negotiating bank along with instructions to pay their own bank. Documents should then be presented to the negotiating bank requesting acceptance (or payment) as outlined by the LC. This would save costs and time. The reason that this will save costs is that in the event that both banks handle the documents then it will mean that commission is charged to pass them on to the negotiating bank.

As stated above; before the beneficiary’s bank forwards the documents without examination to the negotiating bank, they would charge fees to perform a document examination service to the beneficiary. This document checking is not strictly necessary.

It is important to mention that the non-nominated bank does not have any extra security or protection compared to the beneficiary. A document examination service could be offered by the bank but if the bank has not included such examination, then it will be a “silent” confirmation and the beneficiary will have limited recourse against such bank. This will include potential problems, such as the dishonour by the nominated bank or even potential loss of documents when they are sent from the beneficiary’s bank. It can also be viewed an advantage if documents are presented through a banker, so that KYC and AML are covered.

The non- nominated bank will not get protection under UCP, but if the documents are credit compliant then they should get paid on the maturity date.

Where can problems occur?

There may be difficulties where the beneficiary’s bank does not have SWIFT authentication arrangements with the opening bank. The opening bank will send the LC to their correspondent in the beneficiary’s country and restrict the LC to that correspondent.

What are examples of Restricted L/Cs?

An LC may be provided which restricts presentation to a client’s bank and allows them to confirm. It may outline that presentation may not be made at a bank and instructs them that presentations are to be made directly to the issuing bank.

An LC may be restricted to a bank whose London office is the drawee and also the financing and the issuing bank. The beneficiary would deal with the bank and would not maintain their account there, this may be due to the reason that they had wanted to use another bank as the confirming bank due to the better rate they offered.

Another example is a client waiting for an LC from a developing country not known for transactions with a developed country, but the client does not know who the LC will be advised through. It may be that in that developed country, that no bank will add their confirmation due to issuing bank and country risk with no bank having direct SWIFT arrangements with the bank in question.

It is often beyond the beneficiary’s control as to which correspondent bank is selected by the issuing bank and why they might restrict it.

Can the bank directly send the document to LC issuing Bank without going through the negotiating bank?

Yes. UCP600 sub-article 6a and 6d (ii) – If the primary contract is between the issuing bank and the beneficiary and the nominated bank/advising banks/confirming banks are utilised only for the beneficiary’s benefit. If the beneficiary chooses to forego the services of these additional agents and deal with the issuing bank directly that remains the beneficiary’s prerogative.