Topic 9 Advising a documentary credit

Learning objectives
By the end of this topic, you should be able to:

• describe the role of an advising bank;

• outline the responsibilities of an advising bank when advising a documentary credit to a
beneficiary; and
• understand the role and responsibilities of a second advising bank.

Introduction
This topic describes the process from the time of receipt of a documentary credit by a bank
designated as the advising bank or second advising bank to the time it is advised to a beneficiary.

Think…
Before you start work on this topic, consider what you already know about how an advising bank
works. For example:

An advising bank is a feature of almost every cross-border documentary credit, but do you know
how an advising bank is chosen?

Do you know that a second advising bank can be used by an advising bank, without the agreement
of the issuing bank?
9.1 Considerations prior to advising a documentary credit
The choice of advising bank may have been made either by the beneficiary indicating in the sale
contract the details of its own bank as its preferred advising bank and the applicant indicating these
details in the documentary credit application form, or by the issuing bank, in the absence of such
bank being indicated in the documentary credit application form.

For banks that maintain a global or regional presence, the advising bank is very often a branch of the
issuing bank. This enables the same bank to be on both ends of the transaction from a processing
and revenue viewpoint. Otherwise, to be an advising bank, a bank must maintain a correspondent
banking relationship with the issuing bank. This should ensure that the documentary credit is routed
in an apparently authentic form for advising to the beneficiary.

A documentary credit might indicate that an advising bank is to advise the beneficiary of its issuance
through the intermediary of another bank. This bank is known as the ‘second advising bank’.

A second advising bank is often the beneficiary’s banker and, as mentioned previously, is likely to
have been indicated in the sale contract as the bank through which the documentary credit is to be
advised. However, due to no correspondent banking relationship existing between the issuing bank
and that bank, or because of an internal policy at the issuing bank to route documentary credits
through another preferred correspondent bank in that country or to use a branch of the issuing
bank, the chosen advising bank was not that which was requested at the outset by the beneficiary.

The advising bank will be directed to advise the documentary credit to the beneficiary via the second
advising bank.
9.1.1 The application of article 9
Article 9 contains some minimal rules, when advising a documentary credit, which relate to an
advising bank and a second advising bank.

Sub-article 9(a) establishes the basic position that a credit and any amendment may be advised to a
beneficiary through an advising bank and that if the advising bank agrees to advise the documentary
credit, or any amendment, it does so without any undertaking to honour or negotiate a complying
presentation made by, or on behalf of, the beneficiary.

The fact that a bank is not required to advise a credit is made clear in sub-article 9(e).

Should a bank decide not to advise a documentary credit or any amendment, it is not required to
indicate its reason(s) for not advising the documentary credit or amendment.

An advising bank’s primary role is establishing the apparent authenticity of the documentary credit
or amendment that it receives from the issuing bank. Either by a specific statement or the absence
of any statement in its advice of the documentary credit or an amendment, the advising bank will
indicate that it has “satisfied itself as to the apparent authenticity” of the documentary credit or
amendment. This is covered in sub-article 9(b).

Similarly, sub-article 9(c) addresses the same requirement for a second advising bank. However, in
the case of a second advising bank, we are referring to the apparent authenticity of the advice
created by the advising bank. This could be a SWIFT MT710 message (Advice of third bank’s or a non-
bank’s documentary credit), a SWIFT MT707 message (Amendment to a documentary credit) or an
advice that has been issued and sent in a letter by mail or courier service.

Although the main requirement for an advising bank or second advising bank is to determine the
apparent authenticity of the documentary credit (advising bank) or the advising bank’s advice of a
documentary credit (second advising bank), sub-article 9(f) provides for the advising of a
documentary credit where authentication has not been possible and details the requirements for
advising the issuing bank and the beneficiary of this fact.

Because of the significant use of the SWIFT MT700 message type for the issuance of a documentary
credit, the occurrence of non-authentication is confined to a very small percentage of transactions
that are sent by telex or in letter form. However, in today’s regulatory environment, a bank would
be expected not to advise a documentary credit until its apparent authenticity could be determined.

The rules in article 9, are mirrored in the content of ISP98, rule 2.05.

Should an advising bank or second advising bank agree to advise a documentary credit, the issuing
bank is ultimately liable, as instructing party, for any uncollected charges of the advising or second
advising bank. This is covered in sub-article 37(c). Reimbursement of these charges from the
applicant will form part of the separate agreement between the issuing bank and the applicant.

Similarly, sub-article 37(d) indicates that the applicant indemnifies each bank for all obligations and
responsibilities imposed by foreign laws and usages – that is, the laws and usages of the country of
the other banks – if these are different from those of the country of the issuing bank.
 Check your understanding
1.In what circumstances can an advising bank be a branch of an issuing bank?

2.What is the role of a second advising bank?

9.1.2 The risks applicable to an advising bank

An advising or second advising bank undertakes no obligation to honour or negotiate and therefore
incurs no credit risk by advising a documentary credit or an amendment. As we have learned, the
only obligation of the advising bank and second advising bank, if accepting the issuing bank’s
instructions, is to satisfy itself as to the apparent authenticity of the documentary credit or
amendment (advising bank) or the advice of the advising bank (second advising bank) and to advise
the documentary credit or amendment to the beneficiary.

An advising or second advising bank is also to ensure that it advises the documentary credit or an
amendment substantially in the form in which it was received. For example, the bank is to ensure
that the details received, by way of content of the documentary credit and the number of pages of
that documentary credit, are forwarded to the beneficiary.

Information that is considered strictly bank-to-bank information need not form part of the advice to
the beneficiary unless it may be appropriate to another nominated bank, in the event that the
documentary credit is available with any bank.
9.2 Receipt of the documentary credit
As we learned in Topic 7, a documentary credit is generally issued by use of a SWIFT MT700
message, and occasionally by a SWIFT MT799 message. This will enable an advising bank to
determine the apparent authentication of the message in accordance with sub-article 9(b).

For documentary credits sent by telex or in letter form, authentication will be achieved, respectively,
by means of the agreement of the testing algorithm, which will appear on the telex, or the
examination of the signature(s) against specimens held on file.

A second advising bank will receive the documentary credit from the advising bank by means of a
SWIFT MT710 message or telex, or in letter form. As we saw in section 9.1.1, a second advising bank
is required to determine the apparent authenticity of the advice that has been issued by the advising
bank.

9.3 Reviewing the documentary credit against an agreed credit facility

One of the first items to be reviewed will be whether there is an authorisation or request for
confirmation to be added. If the answer is ‘yes’, this will change the form of advice and the process
that needs to be followed. Issues relating to the adding of confirmation are covered in Topic 10.

Even if the documentary credit does not indicate a request or authorisation for confirmation to be
added, there may still be a need to review the main criteria against a credit facility in the name of
the issuing bank.

If a documentary credit is to be advised to the beneficiary, without confirmation, but it is available

with the advising bank and / or second advising bank by deferred payment or acceptance, the bank
is being asked to incur a liability against the issuing bank, should it agree to act on the nomination of
the issuing bank and incur its deferred payment undertaking or accept a draft drawn on it. Prior to
advising such a documentary credit, the bank should check to ensure that the terms and conditions
fall within the parameters of the facility, so that if the beneficiary were to ask the bank to act on its
nomination, there would be a reasonable chance that it will agree.

For example, if the advising or second advising bank were to observe that the terms and conditions
were outside the agreed parameters or that there was little chance of the bank acting on its
nomination, it should inform the beneficiary and issuing bank prior to advising the documentary
credit. This is a prudent course of action so that the beneficiary is not misled in any way that the
bank may be willing or able to act should a complying presentation be made.

9.4 Reviewing a documentary credit against bank policy and regulatory

requirements
The terms and conditions of a documentary credit, including the names of entities or countries,
should be checked against any regulatory requirements, such as sanction regulations that are
applicable to the bank.

Bank policy should also be followed in relation to the type and nature of the transaction, including
the goods and their description in the documentary credit. For example, if a documentary credit
quotes goods as being ‘equipment’, the bank should seek a more detailed description to understand
what type of equipment is to be shipped.

Check your understanding

If an advising bank or second advising bank agree to advise a documentary credit, the issuing bank
is ultimately liable for any uncollected charges of the advising or second advising bank. In which
sub-article is this covered?

a. sub-article 37(c).
b. sub-article 37(a).
c. sub-article 37(d).
d. sub-article 38(c).
9.5 Reviewing the content of a documentary credit
There is no requirement in UCP 600 for an advising or second advising bank to review the text of a
documentary credit to ensure that its terms and conditions appear to be in a workable form. It
should be noted that even if a bank were to complete such a review and come to the conclusion that
the documentary credit appears to be in a workable form, it would be only the beneficiary who
could definitively make that decision.

In this context, some advising and second advising banks will examine every detail and contact the
issuing bank should there be a conflict of data or a need for clarification of a term or condition.

Other banks will review one or more of a select number of criteria, such as expiry date and place,
latest shipment date, goods description, form of availability, Incoterm in relation to freight and
insurance requirements, correct transport document called for, reimbursement conditions
commensurate with the form of availability, etc.

Others will not review the text at all, on the basis that the advice of the documentary credit conveys
no undertaking on the part of the advising bank or second advising bank.

Ultimately, the choice is left to each bank, and the process that is undertaken can often be a factor
in a beneficiary choosing a preferred advising or second advising bank.

In the following section, you will learn about the considerations made by an advising or second
advising bank when reviewing a documentary credit.
9.6 Considerations
There are several considerations made by an advising or second advising bank when reviewing a
documentary credit.

Types of settlement
A bank that examines all, or some, of the terms and conditions of a documentary credit will look at
the form of availability to see what will be expected of it if it agrees to act on a nomination to
honour or negotiate (noting that, in most cases, an advising bank will also be the named nominated
bank or a nominated bank, by virtue of the documentary credit stating that it is available with ‘any
bank’).

In this respect, see Topic 7, section 7.4.2, which provides an outline of the four different forms of
settlement and the types of reimbursement instruction that a nominated bank should expect to see
for each form of settlement.

The place and date of expiry

The place of expiry should be that of the advising or second advising bank (or its country), if the
advising or second advising bank is to consider offering the beneficiary an indication in its advice of
the documentary credit that it may be willing to consider honouring or negotiating a complying
presentation.

Transferable credits
If a documentary credit is stated to be transferable and the advising or second advising bank is the
nominated bank, or the documentary credit is available with any bank and the advising or second
advising bank is nominated to be the transferring bank, and if the advising or second advising bank is
willing to consider a request for transfer submitted by the beneficiary, it should attach to its advice
of the documentary credit its standard transfer request form.

Transferable credits are covered in more detail in Topic 19.

Was the issuance of the documentary credit subject to an earlier pre-advice?

It is highly unlikely that a pre-advice will have been issued where a documentary credit is issued
using the SWIFT MT700 or MT799 message type, or by telex. Pre-advices are discussed in Topic 7,
section 7.12.

A pre-advice will commonly occur when the full terms and conditions of a documentary credit are
issued in letter form. In this event, the documentary credit should clearly refer to issuance of the
pre-advice and its date. The advice of the advising or second advising bank to the beneficiary should
make reference to the pre-advice message.
9.7 Preparing a documentary credit for advising to the beneficiary
An advising or second advising bank will usually maintain a standard form of advice that it uses to
advise a documentary credit to a beneficiary. These will vary in substance from bank to bank.

Some banks will provide an advice that merely indicates that a credit has been issued, will attach a
copy of it and will indicate the charges that are due from the beneficiary, if any.

Other banks will take a more proactive role by indicating the conditions under which they may be
willing to honour or negotiate. They may advertise their willingness to finance where a draft is
accepted or where a deferred payment undertaking is incurred, or to negotiate where a
documentary credit is available by negotiation.

Some banks will also provide beneficiaries with a short guide of how to review the terms and
conditions of the documentary credit, or one indicating the main points for consideration when the
documents are being prepared for subsequent presentation to the bank.

It should be noted that in its advice of the documentary credit an advising or second advising bank is
not required to translate any of its text or interpret any technical terms (see article 35).

An advising or second advising bank may incorporate its own standard wording in relation to certain
matters, such as sanction clauses, the imposition of discrepancy fees, delivery instructions for the
documents, etc.

If a non-bank financial institution has issued the documentary credit, the advising or second advising
bank should make this clear to the beneficiary in its advice.

Check your understanding

Advising or second advising banks are required to examine every detail of a documentary credit.
True or false?
9.8 Transmitting a documentary credit to the beneficiary
In most cases, the advising or second advising bank will advise the details of the documentary credit
in letter form. This letter will either be sent to the beneficiary by mail or by courier, or the
beneficiary will collect it from the offices of the bank. The latter is often the option chosen when an
advising bank wishes to collect its fees in advance – that is, where the documentary credit is
available with any bank and the beneficiary is a non- customer of the advising or second advising
bank.

Some banks now provide electronic delivery of the advice of the documentary credit to their clients
through their front-end systems.

In relation to the actual transmission of the documentary credit or an advice thereof, article 35
provides a disclaimer for banks in the event that any messages or letters are delayed, lost in transit,
mutilated or received with other errors that arose during transmission.

A beneficiary should review the documentary credit upon its receipt to determine if its terms and
conditions are acceptable. If not, the beneficiary should contact the applicant and request an
amendment. It is advisable that only when the documentary credit is in an acceptable form should
the beneficiary commence the manufacture, production or shipment of the goods, or provide the
required service or performance.
Conclusion
Advising or second advising banks perform a valuable service to any beneficiary as an intermediary
between the issuing bank and that beneficiary. As the intermediary, they offer the beneficiary
comfort in knowing that the received documentary credit (or amendment) is apparently authentic.
This removes the risk that a beneficiary could act on a documentary credit that was not actually
issued by the named issuing bank.

As a basic rule, the advice of an advising or second advising bank will have given no undertaking to
the beneficiary that honour or negotiation will take place. However, it should be noted that the
advising or second advising bank could also be named as the confirming bank (see Topic 10).

Think again …
Now that you have completed this topic, how has your knowledge and understanding improved.
For instance, can you:

• explain the responsibilities of the advising and second advising bank under UCP 600?

• outline the kind of data that forms the basis of an advising or second advising bank’s
advice to the beneficiary?

• describe the different approaches that can be considered by an advising or second

advising bank when reviewing the text of a documentary credit?
Test your knowledge
Use these questions to assess your learning for Topic 9.

1. When an advising or second advising bank issues its advice of a documentary credit, it signifies
that it has found the documentary credit or its advice to be which of the following?

a. Genuine.
b. Authentic.
c. Apparently genuine.
d. Apparently authentic.

Answer: D. An advising or second advising bank is in a position to determine only whether a

documentary credit (or the advice of the advising bank) is apparently authentic (sub-articles 9(b) and
(c)). See section 9.1.1.

2. An advising bank receives a documentary credit by way of a telex instruction. The bank is unable
to agree the testing algorithm that has been used. The bank must obtain a corrected authentication
before it advises the documentary credit to the beneficiary. Under UCP 600, is this true or false?

a. True.
b. False.

Answer: False. Sub-article 9(f) permits an advising bank to advise a documentary credit
that it has been unable to apparently authenticate, provided that it informs the
beneficiary or second advising bank of this fact. See section 9.1.1.

3. A second advising bank is required to determine the apparent authenticity of the documentary
credit issued by the issuing bank. True or false?

a. True.
b. False.

Answer: False. A second advising bank is required to determine the apparent authenticity
of the advice that it receives from the advising bank. See section 9.1.1.

4. Fill in the missing words in the following sentence.

An advising or second advising bank is not required to examine a documentary credit to determine
whether it is in a workable form.

There is no rule in UCP 600 that requires either bank to review the documentary
credit to ensure that it appears to be in a workable form. See section 9.5.

5. Because a documentary credit that is to be advised to a beneficiary conveys no engagement or

responsibility of an advising or second advising bank, its contents need not be examined against
bank policy. True or false?

a. True.
b. False.
Answer: False. Banks should always review a documentary credit from the perspective
that it does not breach any bank policy. See section 9.4.

Answers

CHECK YOUR UNDERSTANDING (section 9.1.1)

The advising bank is very often a branch of the issuing bank where they maintain a global or regional
presence. See section 9.1.

A second advising bank is often the beneficiary’s banker and is likely to have been indicated in the
sale contract as the bank through which the documentary credit is to be advised. See section 9.1.

CHECK YOUR UNDERSTANDING (section 9.4)

a. sub-article 37(c). See section 9.1.1.

CHECK YOUR UNDERSTANDING (section 9.7)

False. These banks can choose whether to examine all the content details or not review the text at
all. The process that is undertaken can often be a factor in a beneficiary choosing a preferred
advising or second advising bank. See section 9.5.