Reimbursement Authorization

A reimbursement authorization is an instruction from the issuing bank of a letter of credit to another bank, the reimbursing bank, to pay claims made by a bank that has honoured or negotiated under the credit. The paying bank is called the claiming bank. The arrangement lets a nominated bank in the exporter's country recover its money quickly from a bank that holds the issuing bank's funds, typically in the currency of the credit, instead of waiting to be paid by the issuing bank itself.

Bank-to-bank reimbursement is covered by Article 13 of UCP 600 and, where the authorization incorporates them, by the ICC's Uniform Rules for Bank-to-Bank Reimbursements (URR 725), in effect since 1 October 2008. An authorization is usually sent as a SWIFT MT740. It creates no obligation of the reimbursing bank towards the claiming bank; that requires a separate reimbursement undertaking.

Suppose a friend overseas asks you to pay for something on their behalf and says, "my bank account in your city will repay you, just send them the receipt". Your friend also writes to that bank: "if this person sends a valid claim, pay them from my account". That note to the bank is the authorization.

In a letter of credit, the "friend" is the importer's bank, "you" are the bank that paid the exporter, and the "account in your city" is usually the importer's bank's US dollar or euro account with a large correspondent bank. The paying bank sends a short claim, gets its money back within days, and posts the documents to the importer's bank. The note does not make the correspondent promise anything; it just allows it to pay.

1. When it issues the credit (MT700), the issuing bank states that reimbursement will be made by a named reimbursing bank and whether the arrangement is subject to URR 725.
2. It sends the reimbursement authorization (MT740) to the reimbursing bank, naming the credit, the amount, the currency, the claiming bank or banks allowed to claim, and who pays the reimbursing bank's charges. Changes are made with an MT747.
3. The nominated bank examines the documents, honours or negotiates, then sends a reimbursement claim (usually an MT742) to the reimbursing bank and forwards the documents to the issuing bank.
4. The reimbursing bank checks the claim against the authorization, not against the documents, and pays by debiting the issuing bank's nostro account held with it. Under URR 725 it has up to three banking days following the day it receives the claim to process it.

Where the credit does not apply URR 725, UCP 600 Article 13 provides fallback rules. The issuing bank must give the reimbursing bank an authorization that matches the availability stated in the credit, and the authorization should not carry an expiry date. A claiming bank may not be required to supply a certificate of compliance with the credit's terms, because the reimbursing bank is not supposed to judge the documents. If reimbursement is not made on first demand, the issuing bank is liable for any loss of interest and remains responsible for reimbursing the claiming bank itself. Reimbursing charges are for the issuing bank's account unless the credit and the authorization both say they are for the beneficiary.

URR 725 adds detail on the content of authorizations, how claims must be made, the treatment of claims in advance of a value date, and the handling of unauthorized or non-conforming claims. Reimbursing banks typically follow it because it gives them clear grounds to pay or reject without looking at the trade.

Reimbursement arrangements reflect how cross-border correspondent banking works. Many issuing banks hold dollars or euros only through accounts at large banks in New York, Frankfurt or London. Using one of those banks as the reimbursing bank avoids routing payments through several intermediary banks, and lets the nominated bank receive funds in the same financial centre where it holds its own accounts.

Problems arise when the issuing bank fails to send the authorization, sends it with terms different from the credit, or has too little money in its account. The claiming bank's protection then rests on the issuing bank's direct obligation, which may be slow to enforce. Reimbursement messages also pass through sanctions screening at the reimbursing bank, which may hold a payment where a party, vessel or country produces a match. Confirming banks and nominated banks therefore look at the reimbursement route as part of the overall counterparty risk of a credit, and may ask for a reimbursement undertaking where the issuing bank is weak. Reconciling claims against authorizations is a routine task in a bank's trade finance operations, and the move to ISO 20022 payment messages affects the cover payments that settle these claims.

• International Chamber of Commerce
• SWIFT