Letters of Indemnity (LOI): Major International Trade Cost Factor


I’m not really a fan of horror movies per se, but everyone loves listening to or reading a good horror story (provided it doesn’t involve them). I often ask my interview subjects to share a horror story because, well, quite frankly, it makes for a lot more interesting reading.

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We recently caught up with trade automation software provider Bolero and asked them that classic question – can you share a horror story with us? I have certainly experienced my own share of international-trade horror stories – but I wanted to know, what have others experienced?

Invariably, Bolero mentioned the dreaded LOI (no, not “letter of intent,” for those of you who do M&A) – rather, the Letter of Indemnity.

“Can I Please Get the LOI Today, Dad?”

Before you start yawning, understand this: letters of indemnity resemble the keys to the car, so to speak. The LOI, in trade terms, allows the seller of goods to release cargo without a bill of lading and “indemnifies the carrier against the consequences of doing so.”

That works fine for many long-term business relationships, but every so often cargo – valuable cargo at that – lands in the wrong hands.

In the case of the Bolero prospect, the shipment arrived at the port but the paper work (i.e. bill of lading) was delayed. For commercial reasons – buyers wishing to take delivery and avoid high demurrage charges – the carrier was pressured to release the cargo. Consequently, an LOI was used and the carrier released the cargo to the wrong consignee. The traders were unaware that a fraudulent paper B/L was in play, meaning the mix-up was outside of P&I coverage from the carrier. (P&I is an international maritime trade insurance group). All of the parties to the transaction began suing one another and, ultimately, the bank was left with a $15 million liability.

In addition to the risks of an LOI gone awry, consider the sheer hassle factor of chasing around signatures and documents internally in order for cargo to move in a timely fashion. Moreover, a very senior executive often serves as the primary or sole signer of such documents; the LOI, unlike other documents which can be signed and delivered in a longer time-frame or even overnight, must often be signed within only a few hours at most – forcing that executive to react even more quickly.

All About Reducing Risk

Electronic automation tools provide a timely and efficient mechanism for delivering necessary documents to the necessary people at the necessary time. The “e-Trade way” means that LOIs do not need to replace the more secure Letter of Credit. In fact, one of the biggest mining companies to adopt electronic bills of lading (eBLs) has seen a 90% reduction in the requirement of LOIs on discharge. Fundamentally, the eBL is secure, legally binding, and ensures authenticity – a huge step towards eliminating fraud. An end-to-end electronic financial international transaction would reduce both seller and carrier risk, as well as bank risk.

We also examine how working capital improvements and inventory reduction cinch the business case for trade automation tools in the full FREE compilation of this series – simply fill out the form below:


MetalMiner will be collaborating with Bolero, a cloud-based platform that provides a different way to optimize complex international trade chains. Bolero automates the entire paper-based trade process, generating significant benefits to large mining and metals companies, including accelerated time to cash, reduced costs, reduced risk, greater control and visibility, and operational efficiencies. Check out their site for more details.

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