Productopedia

Product Description:

A Letter of Credit is a product in which the bank issues an authenticated undertaking, representing a commitment to pay a beneficiary a specified amount of money upon the presentation of documents that comply with the terms and conditions of the letter of credit. This is also known as a Documentary Letter of Credit.

Additional Information:

• The client will initially sign a facility agreement.

• Requires a credit line to be set up.

Inherent Risk Rating: Medium (37.1%)

Risk Indicators:

• Can be used as collateral or security for a loan and/or placed in a discretionary or other increased-risk trust.
• Involves the purchase of a product using cash, currency, or currency equivalents, or the transfer of cash, currency, or currency equivalents into a firm.
• Source of payment is not available.
• Allows for funds or value to be transferred electronically directly into the client's bank account.
• Allows acceptance of very high-value or unlimited-value payments.
• Involves two or more counterparties in overseas jurisdictions.
• Does not have information to qualify the cost of the product or service.
• Allows payments to be processed from firms in medium- or higher-risk jurisdictions.
• Requires the placement of marketable securities or collateral.
• The product can be traded on a secondary market.

Possible mitigation controls:

• Compliance approval is required for 3rd party payment and monitoring.
• Compliance approval is required to receive 3rd party payment.
• Agreement supported by underlying documentation (bills of lading, invoices, shipping documents, warehouse receipts, and warrants) containing details of all parties involved in the transaction, currency, value, all countries involved, the purpose of the transaction, and allowing payment only when all conditions outlined in the terms of the instrument have been met.
• Holds no investment value and pays out only upon the occurrence of a specific, verifiable event as determined by the product provider.
• Ongoing monitoring of a business relationship that is triggered by a specific event and includes a view of customer information, risk profile and transactions. Events can include adverse news, a change in status, a change in address, a request for a higher-risk product or service, a change in beneficial ownership or control, a type of business, a move to a higher-risk country, or unusual activity.
• Monitoring of inducements or gifts, and entertainment.
• Includes taking steps to gain an understanding of a customer's business activities, including the nature of the business to be taken with a bank and the anticipated volume and value of the business.
• Prices are set by or marked to the market or checked against prices in the free market.
• The fee arrangement is not tied to performance.
• Entering into a transaction before completing CDD (Customer Due Diligence) or EDD (Enhanced Due Diligence), as appropriate, is not allowed.
• Daily sanctions and adverse press screening, in addition to the risk review cycle.
• Require that originator and beneficiary information be included in the payment.
• Screens financial transactions to identify potential matches against international economic and financial sanctions.
• The Source of Wealth (SOW) of the client is understood.
• Conducts a detailed examination of specific transactions identified as being higher risk.
• Maintains a transparent flow of funds.