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Documentary Risk

Documentary risks are the primary cause of slow or non-payment in international trade. In its simplest form, documentary risk arises from a missing or incorrectly prepared document that is required to complete the buy/sell transaction and/or make payment. Cross border transactions very often involve many documents, but just one missing document or a discrepancy in a document can stop a payment temporarily or permanently.
Some of the more common document problems are caused by

• letters of credit
• import and export licenses
• certifications such as certificates of origin
• customs documents
• transportation documents
• other bank and legal documents.

Here are examples of letter of credit document problems. A seller has received a letter of credit that is denominated in his/her own currency. The seller has eliminated the risk that the buyer will be unable or unwilling to make payment when it is due because the bank that issued the letter of credit now has the payment obligation. The letter of credit states that the seller will be paid upon presentation of certain documents that need to be in conformity with the bank's (and buyer's) requirements under the letter of credit. Documents required by commercial letters of credit for payment may include but are not limited to:

• ocean bills of lading
• air waybills
• certificate of the country of origin
• invoice
• packing list
• insurance certificate
• certifications of weight, quantity or technical specification.

The documents required enable the buyer to clear the goods through customs and comply with any other contractual agreements. All of the requirements for acceptable documentation examination are set for in the ICC Uniform Customs and Practice for Documentary Credits (UCP) published by the International Chamber of Commerce in its latest version. Any modification or amplification to acceptability of required documents will be found on the face of the letter of credit. If any one of the required documents is missing, is not exactly in compliance as required in the UCP and on the face of the letter of credit, is inconsistent with other documents, or is not properly endorsed, the issuing bank will not pay the seller. Some common problems with documents being used for payment with a letter of credit include the following:

• Weights may be in pounds on one document and in kilograms on another.

• Description of goods in the letter of credit is in Spanish, but the invoices and/or packing lists describe the goods in English.

• Goods are not shipped in the quantity or time frame required under the letter of credit.

• There are misspellings in the letter of credit, but other documents have those words spelled properly.

• Negotiable transportation documents are not properly endorsed or consigned.

• Too much or too little has been shipped.

• The name and address of the buyer or seller is not in strict compliance with the letter of credit.

• Documents are not properly labeled to match the documents required under the letter of credit.

• There are inconsistencies between documents for carton, weight or number counts.

• There are incorrect consignment or notification parties on the bill of lading.

• These are only a few of the potential discrepancies that occur with a commercial letter of credit.

Standby letters of credit are issued to a seller by the buyer's bank to cover for noncompliance with agreed upon payment terms. The standby letter of credit virtually “stands by” to pay if the buyer does not meet his/her payment obligations. The documentary requirement to claim under a standby letter of credit is a simple statement declaration made by the seller to the issuing bank of the standby letter of credit. Standby letters of credit are used when shipments are done consistently on a revolving basis to the same buyer. The cost of doing a standby over a commercial letter of credit needs to be evaluated before deciding which payment instrument should be used.
Other documentary risks arise as the result of export and import licenses as well as currency control requirements.

A seller has a contract to deliver goods to a customer in another country. The buyer has the financial strength and character to be willing and able to make payment when the goods are delivered. The buyer has, however, failed to obtain an import license. The goods are held by customs in the buyer's country, and thus the delivery cannot be completed.

A seller has a contract to deliver goods to a customer in another country. The buyer has the financial strength and character to be willing and able to make payment when the goods are delivered. The buyer has a valid import license permitting the importation of a particular quantity of goods during a particular time window. The seller ships the wrong quantity and/or the goods are not shipped into the buyer's country during the specified time window. The goods are held by customs in the buyer's country, so the delivery cannot be completed.

A seller has a contract to deliver goods to a customer in another country. The buyer has the financial strength and character to be willing and able to make payment when the goods are delivered. The seller has failed to obtain a required export license. The goods may be held by authorities in the seller's country, and/or there may be severe civil and/or criminal penalties imposed on the seller.

A seller has a contract to deliver goods to a customer in another country. The buyer has the financial strength and character to be willing and able to make payment when the goods are delivered. The buyer has, however, failed to obtain appropriate authority to convert his local currency to that of the purchase contract. The goods may or not be held by customs in the buyer's country, but the seller will generally not be paid when payment is due, and/or payment may not be made at all.

 
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