Safety mechanisms (FAC) to ensure exporters ship conforming goods in L/C transactions

Question

I am a Korean importer conducting my first transaction with an overseas exporter. Since this is our first deal and the transaction amount is high, I plan to proceed via L/C Usance due to cash flow management issues. I am concerned because the exporter could potentially load defective goods and still receive payment by simply ensuring the shipping documents comply with the L/C (due to the principle of autonomy/abstraction of L/Cs). We have agreed to add a requirement for a Pre-Shipment Inspection (PSI) certificate to Clause 46A of the L/C, but I am still uneasy. From an importer's perspective, are there any other safety mechanisms to induce or compel the exporter to ship conforming goods?

tflow_expert · Accepted Answer

One method could be utilizing the importer's Final Acceptance Certificate (FAC). After shipment, the exporter applies for negotiation (collection) at the bank with the basic documents required under Clause 46A, but arranges it so that only a portion of the total shipment amount is paid initially, and the remaining balance is only paid upon submission of the Final Acceptance Certificate (FAC) issued by the importer to the bank. Under this method, since the exporter will not receive a significant amount of payment unless they obtain an FAC stamped/sealed by the importer, it serves as an incentive to ship conforming goods. However, please note that because an importer may intentionally withhold the FAC even when there are no issues with the goods, an LC transaction requiring an FAC can become a toxic clause from the exporter's perspective.

Safety mechanisms (FAC) to ensure exporters ship conforming goods in L/C transactions

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