Prevention of Risks in Letter of Credit Transactions

1. Choose Trading Partners Carefully

When seeking trading partners and opportunities, contact and understand customers through formal channels (such as attending the Canton Fair and on-site inspections) as much as possible, and avoid doing business with customers whose credit standing is unclear or poor. Before signing a contract, try to entrust relevant consulting agencies to conduct a credit investigation on the customer to ensure informed and correct decisions, preventing wrong choices of trading partners and the consequent hardships.

2. Specify the Contents of the Letter of Credit in the Sales Contract in Advance

The sales contract is the foundation of the letter of credit. The exporter can stipulate the contents of the L/C to be received later in advance in the sales contract. This generally includes: the date of issuance (based on the date received); the validity of the L/C (expiring 15 days after shipment at the exporter's location); specifying the issuing bank and confirming bank (under certain conditions); designating the type of L/C (irrevocable, at sight, transferable, etc.); names and quantities of various documents; allowing partial shipments and transshipment (without specifying interval periods, e.g., 30 days between shipments); stipulating that the exporter has the right to request amendments to L/C terms per the contract, and if the importer fails to do so, the exporter has the right to claim damages.

3. Carefully Arrange the Issuance Method and Terms of the Letter of Credit

In letter of credit transactions, the seller must strictly comply with the shipping and document presentation conditions specified in the L/C to receive payment. Therefore, when signing the sales contract, the seller must carefully arrange and choose the issuance method and terms of the L/C, aiming to arrange it in a manner satisfactory to themselves, and ensuring there is absolute certainty of fulfilling all accepted L/C terms. Avoid stipulating or require amendments for terms that there is no certainty of fulfilling. For example, require the buyer to issue the L/C as soon as possible after signing the contract to allow ample time for production, purchase, or shipment. For new customers, it is advisable to ask them to promptly send a copy to the exporter after their bank applies for or issues the L/C.

Both the exporter and the bank need to carefully review the L/C, with the scope and content focusing mainly on two aspects: first, verify whether the L/C content matches the sales contract. If any discrepancies or unexecutable clauses are found, promptly request the importer to amend the L/C, and only ship goods after receiving the amendment notice from the issuing bank—never rely solely on the customer's promise. Second, review the reliability of the L/C, such as its authenticity, the credit standing of the issuing bank, the type of L/C, and the L/C's effectiveness. Compare and analyze the issuing bank's name, address, and credit status with bank yearbooks. If any doubts arise, immediately inquire with the issuing bank or a correspondent bank to ensure the authenticity, legality, and reliability of the L/C. According to Article 8 of the Uniform Customs and Practice, the advising bank must exercise reasonable care to check the apparent authenticity of the L/C it advises. Therefore, the advising bank is responsible for identifying the authenticity of the advised L/C. In practice, the advising bank often holds signatures of officials of the issuing bank. Regarding this, the seller can refer to The Bankers Almanac and Year Book, published annually in London.