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RESEARCH
RE: SWIFT CODE / LETTER OF CREDIT

What is a SWIFT OR BIC CODE?

A SWIFT code, also called a SWIFT number, is used to identify banks and
financial institutions worldwide. The term Business Identifier Code (BIC) is
used interchangeably with SWIFT code and means the same thing. These
codes facilitate money transfers between banks and are needed for
international wires and SEPA payments. To make an international money
transfer from the United States, you’ll need a SWIFT/BIC code. 1

How is a SWIFT/BIC Code formatted?

A SWIFSANST/BIC code consists of 8-11 characters and follows a

format that identifies your bank, country, location, and branch. The
first four letters represent the bank and usually look like an abbreviated
version of the bank name. These two letters indicate the country where the
bank is located.2

AAAABBCCDDD

1 – Bank code (4 letters)

The first four letters represent the bank and usually look like an abbreviated
version of the bank name.3

AAAA

2 – Country code (2 letters)

These two letters indicate the country where the bank is located. 4
BB

1
https://www.westernunion.com/us/en/swift-bic-codes.html#:~:text=A%20SWIFT%2FBIC%20code
%20consists,country%2C%20location%2C%20and%20branch.&text=The%20first%20four%20letters
%20represent,version%20of%20the%20bank%20name.&text=These%20two%20letters%20indicate
%20the%20country%20where%20the%20bank%20is%20located.
2

(https://www.westernunion.com/us/en/swift-bic-codes.html#:~:text=A%20SWIFT%2FBIC%20code
%20consists,country%2C%20location%2C%20and%20branch.&text=The%20first%20four%20letters
%20represent,version%20of%20the%20bank%20name.&text=These%20two%20letters%20indicate
%20the%20country%20where%20the%20bank%20is%20located.)

3
Ibid
4
Ibid
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RESEARCH
RE: SWIFT CODE / LETTER OF CREDIT

3 – Location code (2 letters or numbers)

These two characters designate the location of the bank’s main office. 5
CC

4 – Branch code (3 digits)

These 3 digits identify a specific branch. ‘XXX’ is used for a bank’s head
office.6
DDD

SWIFT codes are used for transferring messages and routing financial and
business transactions globally between businesses and financial institutions
on the SWIFT network.

How do I know if I need a SWIFT / BIC Code?

Different countries require various codes to conduct money transfers. When

you transfer money between banks, to a bank account across international
lines, or for SEPA payments, you’ll almost always need a SWIFT/BIC
code .Countries that may require a SWIFT/BIC code to send money. 7

Is a BIC code the same as a SWIFT code?

Yes. A BIC (Bank Identifier Code) is exactly the same as a SWIFT code. Both
are made up of numbers and letters used to identify the country, bank and
branch that an account is registered to. And so both provide vital
information when sending a money transfer.8

Is a SWIFT code the same as an IBAN?

No. Basically, they are used to identify different things. A SWIFT code is
used to identify a specific bank during an international transaction. An IBAN
(International Bank Account Number) identifies an individual account in the
individual transaction. The IBAN is used in many countries around the world
and is up to 34 characters long and includes both numbers and letters. Both

5
Ibid.
6
Ibid.
7
Ibid.
8
(https://www.worldremit.com/en/faq/bank-transfers/swift-code)
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RESEARCH
RE: SWIFT CODE / LETTER OF CREDIT

the IBAN and SWIFT codes are important in the smooth running of
international money transfers.9

LETTERS OF CREDIT

What is a letter of credit?

A letter of credit is a written instrument whereby the writer requests or

authorizes the addressee to pay money or deliver goods to a third person
and assumes responsibility for payment of debt therefor to the addressee,

A letter of credit, however, changes its nature as different transactions occur

and if carried through to completion ends up as a binding contract between
the issuing and honoring banks without any regard or relation to the
underlying contract or disputes between the parties thereto. 10

Is a letter of credit a negotiable instrument under the Negotiable

Instruments Law?

No. It is issued to a definite person, and not to order or bearer. It is

generally subject to a condition (presentation by seller of drafts). Hence, it is
not a negotiable instrument.11

State the difference between commercial credit and standby credit.

Commercial credits involve the payment of money under a contract of

sale. Such credits become payable upon the presentation by the seller-
beneficiary of documents that show he has taken affirmative steps to comply
with the sales agreement.

In the standby type, the credit is payable upon certification of a party’s

non-performance of the agreement.

The documents that accompany the beneficiary’s draft tend to show that the
applicant has not performed. The beneficiary of a commercial credit must
demonstrate by documents that he has performed his contract. The
beneficiary of the standby credit must certify that his obligor has not
performed the contract.12
9
Ibid
10
24 A Words and Phrases 590, Permanent Edition
11
Bar Essentials in Commercial Law by Justice Japar Dimaampao p.555
12
J. Dolan, The Law of Letters of Credit, Revised Edition 2000.
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RESEARCH
RE: SWIFT CODE / LETTER OF CREDIT

In a commercial letter of credit, there is a direct payment which the

issuing bank makes the payments to the beneficiary. In contrast, a standby
letter of credit, is a secondary payment method in which the bank pays the
beneficiary only when the holder cannot.13

Enumerate the parties to a letter of credit.

The original parties are:

a. Buyer or importer- he procures the letter of credit and obliges

himself to reimburse the issuing bank upon receipt of the document of
title from the seller.

b. Issuing bank- the bank which issues the letter of credit and
undertakes to pay the seller upon receipt of the draft/documents of
title, and to surrender these documents of title to the buyer upon
reimbursement.

c. Seller/beneficiary/exporter- he ships the goods to the buyer and

delivers the documents of title to the issuing bank to recover payment.

Other parties may include:

a. Advising or notifying bank- the bank utilized to convey to the seller

the existence of the credit. It incurs no liability at all.

b. Confirming bank- the bank which lends credence to the letter of

credit issued by lesser known issuing bank. It is directly liable to pay
the seller beneficiary.

c. Paying bank- the bank which undertakes to encash the drafts drawn
by the exporter/seller.

d. Negotiating bank- the buyer may approach this bank to have drafts
discounted instead of going to the place of the issuing bank to claim
payment.14

Enumerate the independent contracts arising from a letter of credit.

13
https://www.investopedia.com/terms/l/letterofcredit.asp
14
Bar Essentials in Commercial Law by Justice Japar Dimaampao p.557
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RESEARCH
RE: SWIFT CODE / LETTER OF CREDIT

a. Contract of sale between buyer and seller

b. Contract of buyer with issuing bank
c. Letter of credit itself15

Explain the Independence Principle under a letter of credit

transaction.

In determining compliance with the letter of credit, the bank is obliged to

examine only the shipping documents presented by the seller. It is precluded
from determining whether the main contract of sale (between buyer and
seller) has been strictly complied with. Banks deal only with documents and
not with goods, services or obligations to which they relate.

The seller is assured of prompt payment independent of any breach in the

main contract. Thus, the bank has no duty to verify whether the goods
described in the letter of credit or in the shipping documents actually tallies
with what was loaded aboard the ship. This may be invoked by both the
seller and the issuing bank.16

Explain the Fraud Exception Principle.

When the beneficiary, for the purpose of drawing on the credit, fraudulently
presents to the confirming bank, documents that contain, expressly or by
implication, material representations of fact that to his knowledge are untrue
or fraudulent, the bank may be enjoined from paying the draft. This stands
as an exception to the Independent Principle.17

Explain the Rule of Strict Compliance in a letter of credit transaction.

This rule presupposes that the documents tendered by the seller/beneficiary

must strictly conform with the terms of the letter of credit.

The correspondent bank who accepts a faulty tender of the drafts by the
beneficiary may not later recover from the issuing bank or the buyer and
thus, acts on its own risk should it accept such drafts.18

Explain how a letter of credit operates.

15
Ibid
16
Ibid.
17
Ibid.
18
Ibid.
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RESEARCH
RE: SWIFT CODE / LETTER OF CREDIT

The letter of credit operates as follows:

a. The importer and exporter agree on the contract to ship out goods as
well as on the price. They both assent that the method of payment is
through a letter of credit.

b. The importer opens a letter of credit arrangement with the issuing

bank.

c. The issuing bank requires partial or full payment depending upon the
credit trustworthiness and financial standing of the buyer. It may also
require that collaterals be given to assure payment. The importer signs
an undertaking to assume all costs relative to the arrangement.

d. After the issuing bank and the buyer agree on the terms of the letter
of credit, the issuing bank advises the seller’s bank by telex, cable or
fax, or such other means of communication, of the existence of the
letter of credit.

e. The seller bank or the notifying bank advises the exporter/seller of the
letter of credit issued in his favor.

f. The seller then delivers the goods to a shipping company for shipment
and the issuing bank is named as the consignee in the bill of lading.

g. The seller then presents the bill of lading and other documents of title
to the notifying bank which may advance the amount of the price, or
to the seller bank so he could receive payment.

If it is the notifying bank which advances the price, it shall send the
bill of lading and other documents presented by the seller to the
issuing bank so it could claim reimbursement.

h. When the goods arrive at the place of destination, the shipping

company or its agent informs the consignee issuing bank of such
arrival.

i. The issuing bank now informs the buyer about the arrival of the goods.
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RESEARCH
RE: SWIFT CODE / LETTER OF CREDIT

j. The buyer pays the issuing bank for the release of the goods. He shall
present the release paper to the shipping company to claim his
cargoes. However, if the buyer cannot pay in cash, it may apply for the
opening of a trust receipt with the bank.19

***Often in international trade, a letter of credit is used to signify that a

payment will be made to the seller on time, and in full, as guaranteed by a
bank or financial institution. After sending a letter of credit, the bank will
charge a fee, typically a percentage of the letter of credit, in addition to
requiring collateral from the buyer. Among the various forms of letters of
credit are a revolving letter of credit, a commercial letter of credit, and a
confirmed letter of credit.20

** Under the Civil Code, which is suppletory to the Code of Commerce, a

contract, once perfected binds the parties not only to the fulfillment of what
has been stipulated but also to all the consequences in keeping with good
faith, usage and law.

Hence, a claim against the letter of credit is merely an alternative

recourse and does not in any prevent a corporation from claiming directly
against another corporation.21

19
Ibid.
20
https://www.investopedia.com/terms/l/letterofcredit.asp
21
Transified Phils. Inc. v. Luzon Hydro Corporation, 443 SCRA 307, 22