Confirmed Irrevocable Letter of Credit

Confirmed Irrevocable Letter of Credit

Definition:

A Confirmed Irrevocable Letter of Credit (CILOC) is a letter of credit in which a second bank, usually located in the beneficiary’s country, adds its confirmation to the credit issued by the issuing bank. This means that in addition to the issuing bank’s commitment to paying the beneficiary, the confirming bank also guarantees payment, even if the issuing bank fails to fulfill its obligations.

Key Features:

• Irrevocable Nature: It cannot be canceled or amended without the consent of all parties involved (the issuing bank, the beneficiary, and the confirming bank).
• Additional Security: The confirmation by a second bank provides a double assurance of payment.
• Common in International Trade: Often used in cross-border transactions to mitigate the risk associated with different jurisdictions and potential insolvency of banks.

Examples:

1. Export Transaction: An exporter in Italy sells goods to an importer in Brazil. To mitigate risks, the exporter requests a confirmed irrevocable letter of credit. The issuing bank in Brazil issues the letter of credit, and a confirming bank in Italy adds its confirmation to ensure that the Italian exporter will receive payment even if the Brazilian bank defaults.
2. Large Construction Project: A construction company based in Japan is contracted to build a facility in Malaysia. The Malaysian buyer arranges for an irrevocable letter of credit issued by their local bank, which is then confirmed by a Japanese bank to provide added security to the Japanese contractor.

Frequently Asked Questions:

What is the primary advantage of a confirmed irrevocable letter of credit?

The primary advantage is the double layer of payment security. The confirmation from a second bank ensures that the seller receives payment even if the issuing bank cannot fulfill its obligation.

How does a confirmed irrevocable letter of credit differ from a regular letter of credit?

A regular letter of credit is guaranteed only by the issuing bank. In contrast, a confirmed irrevocable letter of credit includes an additional guarantee from a confirming bank, providing an extra layer of surety.

Is the confirming bank always in the beneficiary’s country?

Typically, the confirming bank is in the beneficiary’s country, but it can be in another location as agreed upon by the parties involved.

Who can request the confirmation of a letter of credit?

Either the applicant or the beneficiary can request that a letter of credit be confirmed. This is usually negotiated at the initiation of the transaction.

Are there additional costs involved with a confirmed irrevocable letter of credit?

Yes, there are additional fees charged by the confirming bank for providing its guarantee. These fees are typically higher than those for an unconfirmed letter of credit.

Related Terms:

• Letter of Credit: A financial instrument issued by a bank guaranteeing a buyer’s payment to a seller will be received on time and for the correct amount.
• Issuing Bank: The bank that issues the letter of credit at the request of the applicant.
• Confirming Bank: The bank that adds its confirmation to the letter of credit, thereby guaranteeing payment to the beneficiary.
• Beneficiary: The party in whose favor the letter of credit is issued (usually the seller or exporter).
• Applicant: The party requesting the issuance of the letter of credit (usually the buyer or importer).

Online Resources:

• International Chamber of Commerce (ICC)
• Swift
• World Trade Organization (WTO)

Suggested Books for Further Study:

1. “Letters of Credit: The Law and Practice of Compliance” by Professor E.P. Ellinger
   • This book provides a thorough overview of the technicalities and legal aspects of letters of credit.
2. “UCP 600: Uniform Customs and Practice for Documentary Credits” by International Chamber of Commerce
   • The UCP 600 rules are a set of regulations by ICC, widely used in international trade for letters of credit.
3. “The Law of Letters of Credit and Bank Guarantees” by Agasha Mugasha
   • This text offers an in-depth look into the law governing letters of credit and bank guarantees, essential for understanding case law and regulatory issues.

Accounting Basics: “Confirmed Irrevocable Letter of Credit” Fundamentals Quiz

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