International Trade (Intl Trade) 101: Payment Methods LC Discrepancies Common Discrepancies Consequences Disposal Options

What This Is

LC discrepancies occur when the terms of a letter of credit (LC) are not met, causing delays or disputes in international trade. This can happen when the documents presented do not match the credit terms, or when the goods do not match the description in the credit. For example, a Chinese exporter sells goods to a US importer under an LC with FOB (Free on Board) Shanghai terms. However, the exporter misdeclares the goods as "made in China" instead of "made in Shanghai," causing a discrepancy.

Key Terms & Rules

• FOB (Free on Board): Buyer bears all costs and risks from the seller's premises – most buyer-friendly Incoterm.
• LC (Letter of Credit): A financial instrument guaranteeing payment to the seller upon presentation of compliant documents.
• UCP 600 (Uniform Customs and Practice for Documentary Credits): Governs LC transactions globally, outlining rules for issuing, confirming, and advising credits.
• Incoterms: International commercial terms that define the responsibilities of buyers and sellers in international trade.
• DPU (Destination Port Unloaded): Seller bears costs and risks until goods are unloaded at the destination port.
• DAT (Delivered at Terminal): Seller bears costs and risks until goods are delivered to the terminal.
• DAP (Delivered at Place): Seller bears costs and risks until goods are delivered to the agreed-upon place.
• CIF (Cost, Insurance, and Freight): Seller bears costs and risks until goods are delivered to the buyer's port of destination.
• CIP (Carriage and Insurance Paid To): Seller bears costs and risks until goods are delivered to the buyer's designated port of destination.
• URC 522: Uniform Rules for Bank-to-Bank Reimbursement of Documentary Credits – governs reimbursement of LCs.

Step-by-Step Process

1. Identify the discrepancy: Review the LC terms and documents presented to determine the discrepancy.
2. Notify the bank: Inform the issuing bank or the confirming bank of the discrepancy.
3. Request additional documents: If necessary, request additional documents to resolve the discrepancy.
4. Resolve the discrepancy: Work with the seller, buyer, and bank to resolve the discrepancy and present compliant documents.
5. Reimburse the seller: Once the discrepancy is resolved, reimburse the seller according to the LC terms.

Common Mistakes

• Mistake: Confusing CIF and CIP.
• Correction: CIF includes insurance, while CIP does not. Example: A seller quotes CIF New York, but the buyer receives a CIP invoice.
• Mistake: Assuming "open account" is risk-free.
• Correction: Open account transactions do not involve a letter of credit, and the buyer assumes all risks. Example: A buyer purchases goods from a Chinese exporter without an LC, and the exporter fails to deliver.
• Mistake: Misusing "free on board" with air freight.
• Correction: FOB applies to sea or inland waterway transportation, not air freight. Example: A seller quotes FOB Shanghai for air freight, but the buyer expects the seller to bear costs and risks until delivery.

Exam / Certification Tips

• FOB vs FCA: FOB transfers risk at the seller's premises, while FCA transfers risk at the agreed-upon place.
• Confirmed vs unconfirmed LC: Confirmed LCs involve a second bank guaranteeing payment, while unconfirmed LCs do not.
• DPU successor to DAT: DPU is a more specific term than DAT, which is a broader term.

Quick Practice Scenario

A Chinese exporter sells goods to a US importer under an LC with FOB Shanghai terms. However, the exporter misdeclares the goods as "made in China" instead of "made in Shanghai." Which LC discrepancy arises?

Answer: Misdescription of goods.
Explanation: The exporter failed to accurately describe the goods, which is a discrepancy under the LC terms.

Last-Minute Cram Sheet

• ⚠️ Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.
• FOB (Free on Board) includes all costs and risks from the seller's premises.
• CIF (Cost, Insurance, and Freight) includes insurance, while CIP (Carriage and Insurance Paid To) does not.
• UCP 600 governs LC transactions globally.
• DPU (Destination Port Unloaded) is a more specific term than DAT (Delivered at Terminal).
• Confirmed LCs involve a second bank guaranteeing payment.
• Open account transactions do not involve a letter of credit.