Initiatives of the international chamber of commerce to prevent fraudulent calls on demand guarantees and standby letters of credit

A person (eg, a buyer or employer for construction work) planning to enter into a contract for the purchase of goods or the construction of works by the intended counterparty to the contract (eg, a seller, exporter, supplier or contractor) may wish to have security for the counterparty's performance of his obligations, especially when no previous dealings have taken place between them. In the past, it was common practice in international and local transactions to require the furnishing of a cash deposit to serve as a form of security that the counterparty would indeed perform the undertaken obligation. Later, when international trade expanded, this practice of furnishing cash deposits became prohibitively expensive for the counterparty to comply with. It was difficult for sellers, exporters, suppliers and contractors to survive the strain on their cash flow if they had to rely on their own resources to furnish the cash deposits, and therefore the assistance of financial institutions became essential in this regard. In due course, this practice was replaced with a safer and more convenient practice : the provision of a written undertaking by a bank in favour of the buyer or employer, payable on demand.