Article-13-UCP-600-Bank-to-Bank Reimbursement Arrangements

General meaning of reimbursement is when a business pays back client, or other people for money they spent out of their pocket. Some examples are getting money back for business costs, insurance premiums, and income tax return. Coming back to the contest of UCP-600 “Reimbursing bank’ is the bank named in a documentary credit upon which the nominated bank (the ‘claiming bank’) may claim in respect of any honour or negotiation that it has effected to the beneficiary.

The nomination of a reimbursing bank arise in cases where nominated bank or a bank presenter (on behalf of the beneficiary) is to effect settlement to the beneficiary upon issuing bank’s acceptance of a waiver of discrepancies issued by the applicant. It could also be where a nominated bank has not acted on its nomination to honour or negotiate, but settlement is due to the beneficiary. This situation would be based on the issuing bank authorising the nominated bank or bank presenter for settlement to occur, and that reimbursement for such settlement may be claimed from a named reimbursing bank.

This article covers some very basic arrangements for bank-to-bank reimbursements and URR 725 provides additional clarification and more detailed rules to be followed at each stage of the process, if a reimbursing bank is involved a credit need to state subject to “UCPURR”, however, if credit does not state which rule to be applied then sub-article (b) and (c) of this article will apply.

Field 53a is an optional fields in credit however, it becomes necessary if a reimbursement bank is involve; it specify the name of the bank which has been authorized by the Sender to reimburse drawings under the documentary credit. This may be a branch of the Sender or the Receiver, or an entirely different bank. Field 78 of credit may also need to be reviewed to ascertain the basis of claiming reimbursement from the reimbursing bank.

UCP-600-Bank-to-Bank Reimbursement Arrangements

a. If a credit states that reimbursement is to be obtained by a nominated bank ("claiming bank") claiming on another party ("reimbursing bank"), the credit must state if the reimbursement is subject to the ICC rules for bank-to-bank reimbursements in effect on the date of issuance of the credit.

This sub-article requires a credit issued in the form of MT700 to must state in field (40e) and (40f) in MT740 whether it is subject to URR 725 or not. However, if the documentary credit and reimbursement authorisation are silent in this respect and a bank-to-bank reimbursement is to involve, then the contents of sub-articles 13(b) and (c) will apply.

b. If a credit does not state that reimbursement is subject to the ICC rules for bank-to-bank reimbursements, the following apply:

i.An issuing bank must provide a reimbursing bank with a reimbursement authorization that conforms with the availability stated in the credit. The reimbursement authorization should not be subject to an expiry date.

An issuing bank of a credit must need to issue a reimbursement authorization (usually an authenticated SWIFT MT740) to reimbursing bank stated in filed 53a of a credit, simultaneously while issuing the credit. A reimbursement authorization must need to contain the details of the claiming bank as per availability stated in the field 41a of credit and there must not have any expiry date of that authorization.

ii.A claiming bank shall not be required to supply a reimbursing bank with a certificate of compliance with the terms and conditions of the credit.

A reimbursing bank acts on instruction of an issuing bank and there is no need to provide any kind of certification that the documents are clean or they have paid the beneficiary or any documents with similar effect, a claiming bank (usually a nominated bank or confirming bank) will lodge the claim on the basis of information given in the field 53a and 78 of credit to reimbursing bank, it is issuing bank responsibility to cancel the reimbursement authorization immediately through reimbursement authorization amendment (MT747) once they decide not to pay to beneficiary on the basis of discrepant documents or directly paid.

iii.An issuing bank will be responsible for any loss of interest, together with any expenses incurred, if reimbursement is not provided on first demand by a reimbursing bank in accordance with the terms and conditions of the credit.

As there is no obligation on a reimbursing bank (apart from the case when a reimbursement undertaking issued) if a reimbursement claim is lodged and not paid at time on first demand then an issuing bank will be responsible for the late payment charges or penal interest of a claiming bank.

The reason could be for a non payment by a reimbursing bank; reimbursement claim does not conforms with reimbursement authorization or Nostro account of an issuing bank with reimbursing bank does not have sufficient funds.

iv.A reimbursing bank's charges are for the account of the issuing bank. However, if the charges are for the account of the beneficiary, it is the responsibility of an issuing bank to so indicate in the credit and in the reimbursement authorization. If a reimbursing bank's charges are for the account of the beneficiary, they shall be deducted from the amount due to a claiming bank when reimbursement is made. If no reimbursement is made, the reimbursing bank's charges remain the obligation of the issuing bank.

An issuing bank must need to indicate of reimbursing bank charges in MT740 fields (71a) if same need to be deducted from the account of beneficiary, however, if that field is silent, reimbursing bank’s charges will be on the account of issuing bank by default as per this sub-article. In case, charges is on account of claiming bank and issuing bank has already settled the beneficiary, confirming bank or a nominated bank directly or decided not to pay due to discrepant presentation and an authorization for reimbursement never been utilize or a no claim lodged to a reimbursing bank, issuing bank will be responsible for reimbursing bank’s charges (if any).

c. An issuing bank is not relieved of any of its obligations to provide reimbursement if reimbursement is not made by a reimbursing bank on first demand.

Because credit is an irrevocable instruments issued by issuing bank which promises to pay upon complied presentation; an issuing bank will  not be relieved of its obligation until a beneficiary is not paid as per availability given in the credit. Even if the reimbursement authorization is provided to a reimbursing bank and that reimbursing bank unable to pay to claiming bank due to any reason an issuing bank will not be relieved from its obligations and may have to pay penal interest for late charges as well.

Additional Points to Note:

1.     A reimbursement authorization is usually issued in the form of MT740 (SWIFT).

2.     An amendment to a reimbursement authorization is usually issued in the form of MT747; and same must need to be issued in the form of initially issued authorization, a free format message (MT799) may also be issued for a reimbursement authorization amendment.

3.     A reimbursement claim is usually lodged to reimbursing bank in the form of MT742 (SWIFT);

4.     An authorization for reimbursement, amendment or a reimbursement claim may also be issued in paper format depending upon requirement and arrangement between applicant and beneficiary and there are certain conditions to it.

5.     A reimbursing bank usually used in confirm credit; wherein reimbursing bank may also be located in the same country which is country of beneficiary, however, this is not a mandate requirement.

6.     If a credit state “TT Claim Prohibited” means claim in SWIFT format not allowed and a paper claim need to be lodged if a reimbursing bank is involved.

7.     Mandatory field of MT740 (in case of reimbursement authorization) - Field 40m-docuementry credit number, Field 40f-aplicable rules, Field 32b-currency and amount and field 41a –availability.

8.     The requirement of a reimbursing bank usually may arise in the cases wherein issuing bank does not have RMA with nominated bank or confirming bank and having a nostro account with a reimbursing bank given in filed 53a of credit.

9.     An MT754 message may be used as a pre-notification of a reimbursement claim from the claiming bank to the issuing bank and a pre-debit notification from the reimbursing bank to the issuing bank, however, a free format message MT799 is usually used for both the cases.

10.   An MT756 message may be used by the reimbursing bank to the bank from which it has received a reimbursement claim.

There is a separate provision URR-725 which gives more detailed descriptions wherein a reimbursing bank is involved, which we shall cover separately while discussing URR-725.