Cash cover – gone undercover

Dear Experts,

Having considered the situation described, the following answers should be given to the following questions raised by the issuing bank.

Question 1: Can the beneficiary present the documents direct to our bank, as the place of presentation was clearly stated in the credit as that of the neighbouring country?

Answer: Yes, the beneficiary can present the documents directly to the issuing bank. According to subarticle 6 (d(ii)) of UCP 600, a place for presentation other than that of the issuing bank is in addition to the place of the issuing bank.

Question 2: As we have already made a prepayment of the letter of credit amount as cash cover, do we also have an obligation to pay the beneficiary, as this would be double payment of the letter of credit amount?

Answer: If the documents presented to the issuing bank constitute a complying presentation, the issuing bank has an obligation to pay the beneficiary. This obligation of the issuing bank is stipulated by subarticle 7 (a) of UCP 600 and we can refer to commentary to UCP 600 for a detailed explanation:

“Subarticle 7 (a) states the basic rule that an issuing bank’s undertaking is to honour a presentation that complies with the terms and conditions of the documentary credit when the documents are presented to the nominated bank or the issuing bank. The specific methods of honour are articulated in subarticles (a) (i) to (v). The subarticle states that honour is to be effected by the issuing bank when the documentary credit is only available with the issuing bank or when the presenter chooses to make a presentation directly to the issuing bank (subarticle (a) (i)) or, in the event that a nominated bank does not honour (subarticles (a) (ii), (iii) and (iv)). Subarticle (v) states that the issuing bank will honour if the documentary credit is available by negotiation and the nominated bank does not negotiate.”

The issuing bank cannot refuse to pay the beneficiary referring to “the prepayment already made under the letter of credit”, and it cannot consider the payment to the beneficiary as double payment under the letter of credit.

The issuing bank has transferred a cash cover to the nominated bank in order to facilitate the adding of confirmation by the nominated bank. The cash cover should be used by the nominated bank for payment to the beneficiary provided that all conditions stipulated by the issuing bank in the letter of credit are met (for example, documents that constitute a complying presentation are presented to the nominated bank, the nominated bank has sent them to the issuing bank, and so on).

If the letter of credit expires in the nominated bank without utilisation, the nominated bank should return the cash cover to the issuing bank.

Upon receipt of the documents directly from the beneficiary the issuing bank must inform the nominated bank about such a presentation under the letter of credit and claim to return the cash cover to the issuing bank.

According to the standard banking practice the issuing bank can transfer the cash cover to the nominated bank if the issuing bank approved the respective risk limit towards the nominated bank.

Unfortunately, this operational risk of non-return of the cash cover is a risk and problem for the issuing bank only.

Svitlana Piatak
Citibank, Ukraine