The US Department of Commerce estimated a few years ago that 14% of world trade was paid for by letters of credit. That’s about one trillion dollars! In the U.S. alone, 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 were outstanding at the close of third or fourth quarter 2005 (Documentary Credit World, February-March-April 2006, published by Letter of Credit Survey, Inc., ISSN 1520-0221; www.doccreditworld.com).

Almost all commercial letters of credit (primarily used to pay for imports and exports) are issued “subject to the UCP500”. Many standby letters of credit also include this language. While this appears in the letter of credit, many users do not know what this important phrase means.

The UCP500 stands for the Uniform Customs and Practices for Documentary Credits, 1993 Revision, International Chamber of Commerce Publication Number 500. That’s a real mouthful of a title, thankfully shortened to UCP 500. This publication is the current set of rules, and became effective January 1, 1994.

The UCP was first published in 1933 by the International Chamber of Commerce (ICC). Subsequent revisions were issued in 1951, 1962, 1974 and 1983. The document is revised periodically to ensure that it continues to reflect the custom and practice of the users – and as the world changes, custom and practice also change.

The Banking Commission of the International Chamber of Commerce has been working on the new revision for more than 3 years. The process started with the appointment of a 9 person Drafting Group and a 40+ person Consulting Group. The Drafting Group reviewed all inquiries and reported problems with the language of the UCP500 as well as reported court cases and received input from other sources.

Based on this input, the Drafting Group will create a draft and submit it to the Consulting Group for their personal feedback. Members of the Consulting Group are recognized experts from around the world. Their feedback results in a draft for public comment distributed to the National Committees of the ICC. Membership in the ICC is through related National Committees. In the U.S., this is the United States Council for International Business (the USCIB).

Among the many important anticipated changes to UCP500 are the inclusion of a new article of definitions, clarity on the responsibilities of a confirming bank, a new focus and clarity on the act of “negotiation” (perhaps the most misunderstood word in the entire letter of credit business), as well as a complete review of the transport articles.

The new rules will be named UCP600. It is anticipated that UCP600 will have an effective date of 1 July 2007. That’s less than a year away. While the UCP is not law, if the letter of credit makes itself “subject to the UCP600” that means this set of rules is incorporated into the LC and the parties have agreed to be bound by them.

Why is that important? Because an LC exists to ensure payment to the beneficiary (the seller). If the seller fails to understand the rules that determine whether his documents comply, then he puts his entire payment at risk -- after the merchandise has been shipped!

The new rules impact all “users” of letters of credit. Exporters, importers, customs brokers, insurers, export management firms, and even freight forwarders need to have a thorough understanding of UCP600. Remember, many freight forwarders create the documents that are presented for payment.Your customs duty is determined by how the merchandise is described in these documents; and your insurance for the cargo must reflect correct information to ensure proper coverage.

So – if you are using letters of credit, either commercial or standby, and either domestically or internationally, you need to know about the new rules, the changes, and how they are going to impact you.

How will you learn about UCP 600 and its impact on your business?

One reliable source is the United States Council for International Business – the National Committee that is a member of the ICC. The USCIB will be sponsoring a series of educational seminars in major U.S. metro areas. These will be presented by two experts in international banking and trade:

Frank Reynolds. Frank is president of International Projects, Inc., a Toledo, Ohio based international trade consulting firm. He is well known around the world as an expert on Incoterms and represented the United States to the ICC on the creation of Incoterms 2000.

Donald Smith. Don, author of this article, is Chair of the Banking Committee of the USCIB, and represents the United States to the ICC Banking Commission.

For information on the seminar, please visit the USCIB special website at www.ucp600seminar.org. Or, you can contact Davis Hodge, USCIB’s Manager, E-Commerce, Marketing and Banking – phone 212-703-5061, email edhodge@uscib.org.

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This information is provided by ABC-Amega Inc. -- providing 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.

Donald R. Smith is Vice President of Client Services for Norman Technologies, a Charlotte, NC-based technology consulting firm. He serves as Chairman of the Banking Committee of the United States Council for International Business and in that capacity represents the United States to the ICC Banking Commission. Recently retired from Citibank NA as Vice President of Global Trade Finance Product Management, Don is a frequent speaker and also serves as an expert witness. The opinions expressed herein are those of the author.