Letter of Credit Discrepancy Review Checklist

A documentary letter of credit does not pay because the goods were delivered correctly.

It pays because the beneficiary presents the documents required by the credit in a form that the nominated bank, confirming bank or issuing bank determines to be compliant.

That distinction is responsible for a large share of avoidable payment delays in international trade.

An exporter can manufacture the correct goods, load them on time, deliver them to the correct destination and still receive a refusal notice because the commercial invoice, bill of lading, insurance certificate, packing list or another stipulated document does not comply with the letter of credit.

For companies expecting payment under an MT700 documentary credit, document examination should therefore take place before presentation, not after a bank has identified discrepancies.

Start With the Letter of Credit, Not the Sales Contract

The commercial contract establishes the underlying transaction.

The documentary credit establishes the conditions the bank will examine before payment.

Those two documents should be aligned, but they are not interchangeable.

When examining a presentation, the bank is concerned with the credit and the documents stipulated under it. It is not normally determining whether the exporter performed its commercial obligations in some broader factual sense.

This is why the first step in a discrepancy review is to obtain the final operative letter of credit, including every amendment.

Do not review documents against:

• the original LC application;
• a draft MT700;
• the purchase order;
• the sales contract alone;
• an email from the buyer;
• an earlier version of the credit; or
• a beneficiary's internal document checklist.

The review should be conducted against the operative credit as amended.

If Amendment No. 2 extended the latest shipment date, Amendment No. 3 changed the discharge port and Amendment No. 4 altered the required inspection certificate, the reviewer needs the complete instrument history. The operative terms are the control document.

Build a Documentary Credit Matrix

Before reviewing individual documents, extract every documentary condition from the credit.

A proper matrix should identify:

This converts a long MT700 into an examination worksheet.

It also prevents one of the most common operational mistakes in documentary credit work: examining each document separately without reconciling the presentation as a complete set.

1. Check the Expiry Date and Place of Presentation

Before examining the substance of the documents, determine whether presentation is still possible.

• expiry date;
• place of expiry;
• bank with which the credit is available;
• latest shipment date;
• stipulated presentation period; and
• whether amendments have changed any of these dates.

Under UCP 600, banks examining a presentation have a maximum of five banking days following the day of presentation to determine whether it complies. Where a presentation includes specified original transport documents, UCP 600 also establishes a default presentation period of no later than 21 calendar days after shipment unless the credit provides otherwise, and presentation can never occur after expiry.

An otherwise perfect document set presented too late is still a problem. The presentation calendar should therefore be built before shipment.

2. Check the Commercial Invoice

The invoice deserves particular attention because the goods description receives more specific treatment than data appearing in many other documents.

Check:

• beneficiary name;
• applicant name;
• invoice number and date;
• currency;
• quantity;
• unit price;
• total value;
• goods description;
• Incoterm where required;
• contract or purchase-order reference;
• letter of credit number where required;
• signatures if stipulated; and
• certification wording if stipulated.

The commercial invoice should be checked against the exact requirements of the credit.

Do not casually expand product descriptions with internal stock descriptions, model terminology or marketing language if those additions could create a conflict.

At the same time, document examination under UCP 600 is not generally based on a character-for-character matching test. Data, when read in context, does not have to be identical across every document, but it must not conflict with the credit, the document itself or another stipulated document.

A harmless abbreviation may be acceptable. A change that alters the identity, specification, quantity or commercial meaning of the goods may not be.

Financely has a separate reference covering common LC discrepancies under UCP 600.

3. Recalculate the Invoice

Do not assume the beneficiary's accounting system produced a compliant invoice merely because the arithmetic appears correct.

Check whether:

• the amount exceeds the LC availability;
• tolerance provisions apply;
• partial shipments are permitted;
• partial drawings are permitted;
• freight is included or excluded correctly;
• insurance is included where relevant;
• discounts appear consistently;
• commissions or charges conflict with the credit; and
• currency is correct.

A discrepancy review should include arithmetic, not merely textual proofreading.

4. Check the Bill of Lading or Other Transport Document

Transport documents generate a substantial number of documentary discrepancies because they are normally issued by a third party.

By the time the exporter sees the final bill of lading, cargo may already be on the water.

For an ocean bill of lading, review at least:

• carrier identity;
• signature and capacity of the signatory;
• shipper;
• consignee;
• notify party;
• vessel;
• port of loading;
• port of discharge;
• on-board notation;
• shipment date;
• description of goods;
• container numbers where relevant;
• marks and numbers;
• freight notation;
• clean versus claused status;
• number of originals;
• endorsements;
• transshipment provisions; and
• charter-party implications where applicable.

The credit needs to be read together with the relevant UCP 600 transport-document article and the applicable ISBP practice.

The forwarder's standard operating procedure is not the beneficiary's letter of credit.

5. Check the Shipment Date

Determine what legally constitutes the shipment date for the transport document being presented.

Then compare that date with:

• latest shipment date;
• insurance commencement;
• inspection date;
• certificate dates;
• invoice date where relevant; and
• presentation deadline.

A document set should tell a coherent chronological story.

If an inspection certificate purports to certify a pre-shipment inspection but is dated in circumstances inconsistent with the shipment chronology, that should be investigated before presentation. Dates should be reviewed as relationships, not isolated fields.

6. Check the Packing List

Packing lists look straightforward and are frequently under-reviewed.

• shipper and consignee where required;
• invoice reference;
• package count;
• package type;
• gross weight;
• net weight;
• dimensions;
• marks and numbers;
• container references;
• quantity;
• goods description;
• required signature; and
• required certification.

Reconcile these figures against the invoice, transport document, weight certificate and any inspection certificate.

A bank does not need every document to repeat exactly the same information. It does need the information not to conflict.

If the invoice shows 1,000 units, the packing list 980 units and the inspection certificate 1,000 units, there is a documentary problem even if everybody involved knows that 1,000 units were actually shipped.

7. Check Weight and Quantity Across the Entire Set

Create a reconciliation table instead of relying on visual comparison.

Documentary discrepancies often arise from a figure being manually re-entered by several different organizations.

One source says 98,400 kg. Another says 98.4 MT. Another says 98,040 kg.

The reviewer needs to determine whether the information is merely expressed differently or actually conflicts.

8. Check the Insurance Document

Where insurance is required under the credit, review:

• document type;
• issuer and signature;
• insurance date and effective date;
• insured amount;
• currency;
• risks covered;
• geographical scope;
• claims payable location;
• deductible or excess provisions;
• endorsement;
• insured party; and
• number of originals.

Also verify the required percentage of cover.

Do not assume that the exporter or insurance broker's normal cargo policy meets the documentary credit.

The insurer should receive the actual LC requirement. If the credit requires specific risks or wording, the reviewer should confirm that those requirements appear in the document before presentation.

9. Check the Certificate of Origin

• who is required to issue it;
• whether chamber certification is required;
• country of origin;
• exporter;
• consignee;
• goods description;
• quantity;
• invoice reference;
• shipment details;
• certification;
• signature; and
• date.

Do not assume that a certificate is acceptable simply because a chamber of commerce issued it. The question remains whether the document satisfies the credit.

ISBP 821 contains detailed examination practices covering certificates of origin, beneficiary certificates, inspection certificates, quality certificates and other documentary requirements and should be read alongside UCP 600.

10. Check Inspection, Quality and Analysis Certificates

Commodity, agricultural, energy, metals and raw-material transactions often require third-party certificates.

• certificate of analysis;
• certificate of quality;
• certificate of quantity;
• weight certificate;
• inspection certificate;
• health certificate;
• phytosanitary certificate;
• fumigation certificate;
• beneficiary certificate; or
• manufacturer's certificate.

For each certificate, check the issuer first.

If the LC says the certificate must be issued by SGS, Bureau Veritas or another named inspection company, a certificate produced by the beneficiary will not satisfy that requirement merely because it contains the same information.

Then check the required content. A condition requiring a certificate to state that goods meet a defined specification should not be treated as satisfied merely because the document lists test results without making the required statement.

11. Check Every Required Signature

• which documents must be signed;
• who is permitted to sign;
• whether the signatory must state its capacity;
• whether certification, legalization or countersignature is required; and
• whether copies also require signing under the credit wording.

This sounds elementary. It is also exactly the type of detail that can cause a presentation to be refused. Do not add signature requirements that the credit does not impose, but do not overlook those it does.

12. Check Originals and Copies

Count the documents.

If the credit uses wording like this, the reviewer should confirm exactly what has been presented and whether those documents qualify as originals or copies under the applicable rules.

The same applies to:

• full sets of bills of lading;
• insurance documents;
• certificates;
• packing lists;
• drafts; and
• beneficiary statements.

A document set can be substantively perfect and still fail because the presentation contains the wrong number or form of documents.

13. Check Names and Addresses

Create one controlled master-data sheet containing the approved spelling of:

• applicant;
• beneficiary;
• consignee;
• notify party;
• issuing bank;
• nominated bank;
• insurer;
• carrier;
• inspection company; and
• manufacturer where relevant.

Then compare documents against it.

Do not automatically classify every abbreviation or address variation as a discrepancy. Documentary credit examination requires more judgment than that.

The question is whether the information conflicts with the credit or another stipulated document. Obvious errors in legal names, consignee details or required transport-document addresses should nevertheless be corrected before presentation whenever possible.

14. Check the Incoterm

If the documentary credit refers to an Incoterm, determine whether it appears where required and whether the documents are economically consistent with it.

CIF, CIP, FOB and FCA impose materially different transport and insurance responsibilities.

An LC should not be drafted mechanically around an Incoterm that conflicts with the actual trade structure.

If that problem is identified before issuance, amend the credit. If it is discovered after shipment, the options may be significantly narrower.

15. Check Whether Partial Shipment Is Allowed

Do not confuse partial shipment with partial drawing.

• whether partial shipments are permitted;
• whether partial drawings are permitted;
• whether the shipment actually constitutes a partial shipment under the relevant rules;
• remaining LC balance;
• quantities already drawn;
• any shipment schedule; and
• any instalment conditions.

This becomes especially important under revolving, scheduled or multiple-shipment credits. Maintain a utilisation schedule rather than relying on memory.

16. Check the Draft, If One Is Required

Where the credit requires a bill of exchange or draft, verify:

• drawer;
• drawee;
• amount;
• currency;
• tenor;
• date;
• maturity calculation;
• LC reference;
• endorsement; and
• signature.

A sight draft and a usance draft are not interchangeable.

Where payment is deferred, maturity should be calculated from the event specified in the credit, whether that is sight, bill of lading date, invoice date or another defined trigger.

17. Read Field 47A Carefully

A large proportion of troublesome MT700 credits become troublesome in the additional conditions.

Field 47A can introduce requirements that materially change the documentary burden.

Look for requirements concerning:

• document wording;
• signatures;
• third-party issuers;
• shipping conditions;
• courier requirements;
• discrepancy charges;
• bank charges;
• document legalization;
• beneficiary certificates;
• presentation routing;
• tolerances; and
• conditions affecting payment.

The fact that a condition appears outside Field 46A does not mean it can be ignored.

A strong discrepancy review maps requirements across the entire operative credit, not merely the obvious "documents required" section. For companies still at the issuance stage, our MT700 SWIFT message guide explains the principal fields that determine the documentary credit structure.

18. Identify Non-Documentary Conditions

Some credits contain conditions without stipulating a document that must evidence compliance.

These require careful treatment under UCP 600.

They should also be identified during draft review because poorly constructed non-documentary conditions create uncertainty without necessarily giving the bank a document against which to examine compliance. The better solution is generally to fix ambiguous LC wording before issuance rather than attempting to interpret it after shipment.

19. Review Every Amendment

An amendment can solve one problem and introduce another.

For each amendment, record:

• amendment number;
• date;
• provision changed;
• old requirement;
• new requirement;
• whether the beneficiary accepted it where relevant; and
• effect on other documentary requirements.

Then consolidate the credit.

The document checker should not have to mentally reconstruct four amendments while examining a packing list. Produce one controlled working version reflecting the operative requirements.

20. Run a Cross-Document Conflict Review

This is the final substantive test.

Take the completed presentation and ask whether the data creates one coherent transaction.

What Happens When a Discrepancy Is Found?

The answer depends primarily on timing.

Before the document is issued

Correct the instructions to the third-party issuer. This is the cheapest point to solve the problem.

After issuance but before presentation

Determine whether the document can legitimately be corrected, reissued, endorsed or replaced.

Before shipment where the credit itself is defective

Request an LC amendment. Do not knowingly ship against an LC whose documentary conditions cannot be satisfied on the assumption that the buyer will waive the problem later.

After presentation

The position becomes more difficult.

If the examining bank determines that the presentation does not comply, UCP 600 contains specific requirements governing refusal. A refusal notice must identify the discrepancies on which the bank relies and state the disposition of the documents.

The beneficiary may then have to consider:

• correction and re-presentation, if time remains;
• applicant waiver;
• amendment where still possible;
• disposal or return of documents;
• challenging an invalid discrepancy; or
• challenging an ineffective refusal notice.

A waiver is a remedy. It is not a documentary control procedure.

Do Not Depend on the Applicant to Waive Discrepancies

This is one of the worst habits in documentary credit transactions.

Perhaps they will.

But the commercial position has changed.

A complying presentation gives the beneficiary the benefit of the bank's independent undertaking, subject to the terms of the credit.

A discrepant presentation introduces applicant discretion into the payment process.

That is precisely the counterparty risk the documentary credit was intended to reduce.

Market conditions may have moved. The buyer may have:

• a downstream problem;
• liquidity pressure;
• a reduced need for the goods;
• a commodity-price problem; or
• a commercial reason to delay acceptance.

A technical discrepancy can suddenly become commercial negotiating leverage. The objective should be a complying presentation, not a presentation that the exporter hopes someone will waive.

When Should the Discrepancy Review Take Place?

Ideally, there should be more than one review.

That final review should be performed on the entire set.

What Financely Checks

For clients requiring documentary credit support, Financely can review a proposed or completed presentation against the operative LC and identify bank-facing discrepancy risks before submission.

Where the problem lies in the LC itself rather than the documents, the review can also identify provisions that should be amended before presentation or, preferably, before shipment.

Financely also provides MT700 DLC issuance services for companies that require support structuring the credit before it is issued.

What We Need for a Discrepancy Review

1. the operative letter of credit;
2. every amendment;
3. the commercial contract or purchase order;
4. the complete document set available for presentation;
5. details of any documents still pending;
6. shipment date;
7. LC expiry date;
8. proposed presentation date; and
9. any previous bank comments or refusal notices.

If the bank has already refused the presentation, include the complete refusal message. The exact wording matters.

The Objective Is Not Perfect Paperwork

The purpose of a discrepancy review is not to make the documents aesthetically consistent.

It is to determine whether the presentation complies with the documentary credit.

Some differences do not constitute discrepancies.

Some differences that appear trivial do.

The distinction requires reading the instrument, the presentation, UCP 600 and international standard banking practice together.

For material transactions, documentary compliance should be controlled before the presentation leaves the beneficiary.