Even if your company isn't ready for more corporate governance, guess what: more is on the way. But whereas, say, Sarbanes-Oxley was designed as a knee-jerk reaction to discourage Enron-like scandals in the U.S., new rules of credit that take place July 1, 2007, affect every company doing business under letters of credit.

To the uninitiated, the International Chamber of Commerce (ICC) first issued the Uniform Customs and Practices (UCP) for Documentary Credits in 1933. Written into virtually every letter of credit, the UCP are accepted worldwide. Endorsed by the United Nations Commission on International Trade Law, the mission was to provide clarity and consistency to conflicting laws on letters of credit in different countries and bring uniformity to worldwide banking practices.

The rules have been revised numerous times — bankers, importers and exporters use the last amendment in 1993, UCP 500, widely. Now there's a 600 rule, as crafted by the ICC. The 600 rule is the result of more than three years' of extensive work by experts and incorporates a slew (and we mean slew) of changes from UCP 500:

A leaner set of rules, with 39 articles rather than 49 articles of UCP 500; a new section of "Definitions", containing terms such as "honour" [sic.] and "negotiation" and a section of "Interpretations" that will clarify meanings of ambiguous terms; replacement of the term "reasonable time" with a definite number of days (five banking days) for examining and determining compliance of documents; a new provision concerning addresses of the beneficiary and the applicant; an expanded discussion of "original documents"; re-drafted transport articles aimed at resolving confusion over the identification of carriers and agents; new provisions to allow the discounting of deferred payment credits; provisions to allow banks to accept an insurance document that contains reference to any exclusion clause.

Phew! That's an awful lot of legislation to retain, let alone implement. That's why bankers, traders and corporations the world over are chomping at the bit to get a hold of the UCP 600 guidelines when it goes on sale (pssst! — sign up for the Business Bookstore mailing list at www.iccbooks.com to be notified by e-mail as soon as the UCP 600 become available.) However, as the following excerpt illustrates, 600 is out to bring some discipline to areas where there is little to none:

The UCP 600 comes at a time when the use of letter of credit is on the decrease worldwide due to high bank charges associated with documentary credits and divergent interpretations that banks adopt. Hopefully, the new set of rules will lead to more order and discipline, especially among banks in Bangladesh, Middle East and parts of Africa.

The Gulf News is also keeping a close watch on UCO 600 developments. In fact, the ICC Bahrain Trade Finance Forum (TFF) announced that UCP 600 (ICC Publication No 600) is now available with the Paris-based ICC Commission on Banking Technique and Practice.

ICC Bahrain TFF Chairman Pradeep Taneja, who is head of global trade service with BankMuscat International, said:

UCP 600, which contains significant changes to the existing rules, will go a long way in restoring and increasing the usage of Letters of Credit in international commerce, whose number at some 5.3 million per annum is believed to be waning due to complexities of its predecessor, UCP 500.

But perhaps IOMA magazine lays it on the line the best when it comes to the impact of UCP 600 revisions: "International trade depends on it; approximately 14 percent of world trade was settled using letters of credit — almost $1 trillion dollars — last year."

Moreover:

Failure to comply with the new UPC 600 rules can put payments at risk. After all, according to statistics compiled by Documentary Credit World, almost $40 billion in commercial letters of credit issued by U.S. banks, U.S. branches/agencies of non-U.S. banks, and by thrift institutions in the United States were outstanding at the close of 3rd or 4th quarter 2005.

Clearly, a lot is at stake, and inquiring minds (not to mention the international business community) want to know: Will your company be ready for UCP 600 when it goes into effect?

Resources

Understanding and Using Letters of Credit

Deadline for new rules on documentary credits
by Soman Baby
Gulf Daily News, Dec. 22, 2006

New UCP 600 Rules: Get Ready for Major Changes
IOMA, Oct. 4, 2006

Revised rules on letters of credit approved
Business Standard, Nov. 26, 2006