Assignment of Proceeds- What it is?

Assignment of proceeds is a process by which the beneficiary of a Letter of Credit may transfer the full or partial amount of export proceeds to a third party (shipper or supplier).

Why and when assignment of proceeds issued?

There are three main ways that a beneficiary of a Documentary Letter of Credit (DC) can use the original DC to pay suppliers using the DC itself.
The first is to ask a bank to issue a Back to Back DC using the original DC as collateral. This method has in the past, unfortunately, been shown to be vulnerable to fraudulent trading, and so now banks will rarely agree to cover the risk.
The second is to obtain a Transferable DC. If the supplier and all banks involved in the transaction agree, it is possible for the original beneficiary to request that the bank at which the DC is available, to transfer part of the value of that DC to the supplier (always known as the second beneficiary). It is possible for the original beneficiary to transfer to more than one supplier, but the total sum transferred must not exceed the value of the original DC. One of the main problems with this method is that in some countries, their fiscal policies do not allow DC’s originating from those countries to be transferable.
The third way that a DC beneficiary can use a DC to pay suppliers is through an Assignment of Proceeds. In UCP 600, this is covered by Article 39 which merely states that the beneficiary has the right to assign any proceeds from the DC to which they are entitled.
Parties in Assignment of Proceeds:
There are mainly three parties in the process: Assignor, Assignee and Bank (Exporter’s Bank/Nominated Bank). Assignor is the beneficiary of the Letter of Credit (exporter) whereas Assignee is the person/entity to whom the assigned amount is to be paid. Exporter’s bank (nominated bank) acts as an intermediary between the Assignor and Assignee.

Process of Assignment of Proceeds:

• The assignor (exporter/beneficiary) submits a request to its bank (nominated bank) for the assignment of proceeds.
• If acceptable to the Nominated Bank, it advises the assignment of proceeds to the assignee.
• The nominated Bank presents documents to the Issuing Bank/Confirming Bank.
• Issuing Bank/Confirming Bank releases the payment/proceeds to the Nominated Bank against complying presentation.
• The nominated Bank transfers the funds (in full or part) to the assignee as per the instruction of the assignment of proceeds

UCP-600 Article-39 (Assignment of Proceeds):

”The fact that a credit is not stated to be transferable shall not affect the right of the beneficiary to assign any proceeds to which it may be or may become entitled under the credit, in accordance with the provisions of applicable law. This article relates only to the assignment of proceeds and not to the assignment of the right to perform under the credit.”

In the assignment of proceeds, the beneficiary only transfers the right to receive the payment whereas the right to perform (shipment of goods) remains with the exporter/beneficiary as mentioned in the Letter of Credit.
This article (39 of UCP 600) provides very limited information and procedures on how to handle the proceed/right transfer. Rather, UCP 600 has left the issue to the provisions of the applicable law of the beneficiary/exporter’s country. The assignor and the bank to whom the request to assign proceeds is made should act to the extent the local law permits.

UCP600 DRAFTING GROUP’S COMMENT ON ASSIGNMENT OF PROCEEDS:

“Assignment of proceeds by a beneficiary is a regular occurrence under a DC, e.g., assigning part or all of the proceeds to another supplier in respect of the cost of some or all of the goods, or to a bank when financing and/or discounting under a DC has occurred. This right exists even if the DC does not specifically state that it is transferable.”