CONFIRMED AND UNCONFIRMED LETTERS OF CREDIT IN CZECHOSLOVAK FOREIGN TRADE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80-00809A000700230205-7
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 4
• Document Creation Date: December 22, 2016
• Document Release Date: July 12, 2011
• Sequence Number: 205
• Publication Date: July 11, 1955
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/07/14: CIA-RDP80-00809A000700230205-7
STAT
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 Sanitized Copy Approved for Release 2011/07/14: CIA-RDP80-00809A000700230205-7
CONFIRMID AND UNCONF J I OF CREDIT
IN CECHOSIAVAr, FOREIGN TRADE
[Comment: This report summarizes an article by A. Hrdina, in
Zahranicni Obchod (Foreign Trade), No 9, September 1954, published
by the Czechoslovak. Ministry of Foreign Trade in Prague,)
Since World War II, letters of credit have become the most commonly used
method of payment for goods in international trade with capitalist nations.
This method of payment was put into practice because letters of credit permit
the seller to receive payments for goods immediately after shipment. The
buyer receives assurance that the payment will be made only if the seller prcmptiy
and properly fulfills the conditions of the letter of credit which were es-
tablished by the buyer in advance. In the use of letters of credit, however,
one important problem arises; that is, the problem of confirmation of the
letters of credit. Czechoslovakia has not ye; devoted adequate attention
to this problem.
Many workers in foreign trade and in the international payments system
clearly understand the diffefence between, and the importance of, confirmed
and unccrfirmed letters of credit. However, there are also those who view
letters of credit in international trade as a guarantee to the seller that
if he properly and promptly satisfies the conditions of the letters of
credit, he will be compensated in the amount specified in the document, and
that the question of confirmation of the letters of credit is a matter to
by dealt with by the banks.
The 13th Congress of the International Chamber of Commerce, held in
Lisbon in 1951, accepted a set of resolutions dealing with letters of
credit. [Article quotes from Paragraph 5 of these resolutions which de-
fines the responsibilities of the bank to the beneficiary of the letter
of credit it has issued.
First, let us study the significance of confirmed letters of credit
for Czechoslovakia's export trade. An irrevocable letter of credit issued
by a foreign bank is always confirmed by that bank. This means that the
bank will pay to the Czechoslovak beneficiary the amount specified in the
letter of credit when the conditions of that document have been satisfied.
This applies in the cases of most types of"Commercial Letters of Credit"
issued by banks in Britain, the North American countries, and in the Middle
and Far Fast. The letter of credit id sent to the beneficiary in its
original form through the medium of the State Bank or sometimes directly,
and the bank is authorized, like any "bona fide holder" of the instrument,
to purchase the letter of credit, and then claim the amount it paid to
the exporter from the foreign bank which issued the letter of credit.
This applies even if the "bona fide holder" of the instrument is a bank
in a third nation, one other than the exporting and importing nation.
Thr same applies to letters'of credit of the "L' uopean" (continental)
type by which a foreign bank notifies the State Bank that it has issued
an irrevocable letter of credit in favor of a Czechoslovak seller and re-
quests the State Bank to notify the beneficiary of the letter of credit,
without authorizing the State Bank to attach its confirmation.
STAT
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In neither case, therefore, is the State Bank under obligation to the
Czechoslovak exporting Foreign Trade Enterprise (PZO), The State Bank merely
occupies the position of an intermediary who relays or interprets the mes-
sage it has received. Only upon the negotiation, that is, the purchase of
the instrument, does the State Bank assume any legal relationship to the
foreign bank and to the local foreign trade enterprise. From the practical
standpoint, this means that the State Bank purchases the instrument with
the reservation that it alone shall receive payment for the instrument
which it has negotiated. The appropriate equivalent of the foreign bill
of exchange is turned over to the Czechoslovak foreign bill of exchange
management only after the instrument has arrived in the foreign country.
At least enough time must be allowed for the instrument to be forwarded
by mail to the foreign bank and for the credit balance or notification
of payment to be returned to the State Bank.
In cases of letters of credit confirmed by the State Bank, the State
Bank itself assumes a legal relationship to the beneficiary. It pledges, on
the basis of a pledge by the foreign bank, to pay to the local foreign trade
enterprise the amount specified in the instrument when the conditions of the
letter of credit have been satisfied. The fact that the State Bank itself
incurs an obligation through the letter of credit not only leads to deter-
mine the foreign bank's ability to pay, just as it does in the case of all
letters of credit issued by foreign banks, but also given the State Bank
the power to ascertain directly the financial coverage of the letter of
credit. This is ensured by the fact that the coverage for the letter of
credit is confirmed by some first-class foreign bank. If the letter of
credit was issued on the basis of Czechoslovak crowns, the State Bank may
demand payment in advance. Advanced coverage for letters of credit given
to the State Bank by a bank in a foreign country cannot be used by the State
Bank until it has made payment. It is evident that th' negotiability of
foreign bills of trade is more convenient for the entire foreign trade
economy than the use of unconfirmed letters of credit.
We know from experience that British and North American banks are
not willing to permit their "Cor=ercial 1,etters of Credit" to be con-
firmed by other banks, eventhough in reality this has occurred. This
is L remnant from the days vnet only one world market existed, and when
British and North American banks stood cut as wcrld banks
controlling international payments. Confirmation o, letters of credit
issued by these banks indicated a lack of confidence in the bank's fi-
nancial position.
It is necessary to understand that in the confirmation of letters
of credit, the banks charge fees according to an established system of
rates, and that in the case of Czechoslovak exhorts, these charges must
be borne by the foreign buyer. B?.rk c ,arCes for confirmation of letters
of credit are normally double those charged for issuance )f the letter
of credit. Therefore, it is not al?.tays ea_s.. to .ea-ade the foreign buyer
to allow the State Ban?; tc confirm letters o! credit to the local foreign
trade enterprise, which is handling t _,e exuort order.
In the cases of Czechoslovak lmpo:-ts, the foreign seller desires that
the Czechoslovak Foreign Trade ='nterr:se as the buyer, issue an irrevocable
letter of credit confirmed by the seller's bank. The extent of the seller's
interest in making the sale and toe nature of the goods determine whether
he will possibly accept an irrevocable letter of credit issued by the State
Bank, and allow his bank merely to deliver the letter of credit to him, or
perhaps permit the State Bank to send the letter of credit directly to him.
This can be done only in cases of letters of credit issued by the State Bank.
STAT
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This then would be a type of Czechoslovak "Commercial Letter of Credit."
This method could be applied to letters of credit issued in Czechoslovak
crowns. Probably it could be applied in cases of letters of credit is-
sued on the basis of currency of a third nation. Certainly, however, in
many cases the foreign seller would be satisfied with a letter of credit
merely transmitted to him by his bank, without regard for the currency
basis on which the letter of credit was issued. In all these cases this
would mean that the settlement of foreign bills of trade would occur only
after presentation of the required documents in the foreign nation and
after the State Bank had been notified that the documents had been pre-
sented, or even after the State Bank had received the documents, If the
foreign seller insists on a letter of credit confirmed by his bank, this
can be accomplished by his paying the confirmation charges.
Proper demands in Czechoslovak export for the use of letters of credit
confirmed by the State Bank and the proper use in Czechoslovak import of
letters of credit not confirmed by foreign banks, would provide advantages
in the management of foreign bills of trade, would permit savings on
charges required by foreign banks, and would increase the income from
payment exacted from foreign banks. In addition, such conduct of business
would also fulfill Czechoslovakia 'e plan of foreign trade activity as
outlined by Comrade Novotny at the Tenth Congress of the Communist Party
of Czechoslovakia; that is, to contribute to the brisk development of
commercial relations with all nations according to the principles of
equality, and on the basis of providing mutual benefits.
STAT
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Sanitized Copy Approved for Release 2011/07/14: CIA-RDP80-00809A000700230205-7