LC Discrepancies, a Sanctions Alert and a Request to Backdate
A textile importer in Faisalabad has an irrevocable sight LC for USD 480,000, 20% cash margin, latest shipment 31 May, expiry 15 June. Documents arrive at the bank on 6 June. The bank finds: shipment on 4 June; bill of lading consignee 'to order' rather than 'to order of issuing bank'; an insurance certificate dated 6 June with no evidence cover began earlier; and the vessel's name matches a sanctions screening alert. The applicant says the discrepancies are 'minor', asks the bank to treat documents as received on 3 June, and wants the margin adjusted at yesterday's exchange rate because PKR has depreciated. No forward cover was booked. The bank must act within UCP 600 time limits and SBP foreign-exchange rules.
1. Identify the discrepancies and outline the refusal process under UCP 600.
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The clear discrepancies are: late shipment (4 June against latest shipment 31 May); B/L consignee ('to order' rather than 'to order of issuing bank' as required by the LC); and insurance dating (certificate dated 6 June with no evidence that cover commenced by the shipment date). The sanctions alert is not a documentary discrepancy but a compliance issue that must be resolved before payment.
Under UCP 600, the bank has a maximum of five banking days following the day of presentation to examine and refuse. Refusal must be by a single notice stating each discrepancy and stating whether documents are held at the bank's disposal or are being returned. The bank must not backdate documents or treat them as received on 3 June. If the applicant waives discrepancies, the bank still cannot ignore a valid sanctions match.
2. How should the bank handle the sanctions alert before deciding on the documents?
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The bank should immediately escalate to compliance and freeze the documentary process pending screening. It should screen the vessel, owner, manager, flag, port of call and counterparties against applicable sanctions lists. If the match is a true positive, the bank must not make payment or release documents; it should follow SBP/AML requirements, including reporting and, where required, holding funds. It must avoid tipping off the customer.
If the alert is a false positive, compliance should document the clearance and the bank can then proceed to handle the documentary discrepancies. Sanctions screening is independent of the applicant's waiver of discrepancies; a waiver cannot cure a prohibited payment.
3. What is the correct FX and margin treatment, and what should the bank tell the applicant about the backdating and rate request?
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The margin and exchange rate must be applied at the prevailing market rate on the date the bank actually makes the payment or settles the transaction, not yesterday's rate. The bank should not use a retrospective rate to benefit the applicant. If the customer wants certainty, it should book a forward cover at the market rate for the settlement date, subject to credit approval.
The bank must refuse to backdate the documents or alter the receipt date. That would misrepresent the presentation and could facilitate a documentary fraud. The applicant should be told in writing that the discrepancies will be handled through formal refusal or waiver and that the sanctions alert must be cleared before any payment.