Bank Confirmation Letter

What is a Bank Confirmation Letter?

A Bank Confirmation Letter is a document issued by a bank or financial institution to confirm the existence and validity of a loan or credit line provided to a borrower or client. This letter serves as a form of credit guarantee. Bank Confirmation Letters are typically used in large commodity transactions to establish the financial capability and creditworthiness of the buyer, thereby providing the seller with increased confidence and security. They are also used by accountants or auditors during the audit process to obtain and evaluate audit evidence from the bank.

Contents of a Bank Confirmation Letter

The contents of a Bank Confirmation Letter can vary based on the situation and purpose, but generally include the following basic elements:

1. Issuer: This refers to the bank or financial institution providing the loan or credit line to the borrower or client. The issuer should clearly state its full name, address, contact information, etc., in the letter for verification purposes.
2. Recipient: This pertains to the client or company needing confirmation of the loan or credit line, i.e., the borrower or client. The recipient's full name, address, and contact information must be clearly stated in the letter for verification purposes.
3. Confirmation Details: The specific details that need to be confirmed, such as the type of loan or credit line, amount, interest rate, terms, and security methods. These details should be filled in based on the information provided by the applicant and verified by the issuer to reflect a true, complete, and valid transaction.
4. Date of Issuance: The date when the Bank Confirmation Letter is issued, usually aligning with the financial reporting date of the client or company. The date should be in the format of year, month, and day, and should coincide with the signatory’s signature.
5. Statement of Authenticity: This includes a statement by the issuer on the authenticity, completeness, and validity of the letter's contents, as well as any potential risks and responsibilities. The statement should clearly outline the obligations and liabilities the issuer assumes and those it does not.
6. Signatory: The authorized representative of the issuer, who is legally capable of issuing the Bank Confirmation Letter and responsible for its content. The signatory should personally sign the letter and affix the issuer’s official seal. The signature and seal should match the issuer’s name and address for verification purposes.

Characteristics of a Bank Confirmation Letter

As a credit guarantee document issued by a bank or financial institution, a Bank Confirmation Letter has the following characteristics:

1. Credit Guarantee: The letter serves as a form of credit guarantee, where the issuer uses its own credit to assure the recipient that if the borrower or client fails to fulfill certain obligations, it will make the necessary payments or provide economic compensation. The recipient can claim based on the letter without needing additional evidence or conditions.
2. Independence: The letter is an independent commitment unrelated to any underlying contract or transaction, possessing independent legal validity. Rights and obligations between the issuer and recipient rely solely on the contents of the Bank Confirmation Letter, unaffected by the underlying contract or trade.
3. Payable on Demand: The letter usually serves as a payable-on-demand guarantee. Depending on the nature of the guarantee, it can be subordinate or independent. A payable-on-demand guarantee means that the issuer unconditionally undertakes payment responsibility upon the beneficiary presenting a claim letter or meeting other specified terms.
4. Diversity: The contents and format of the letters vary based on business type, transaction method, and mutual agreements. Generally, they include the issuer, recipient, confirmation details, date of issuance, statement of authenticity, and signatory. Based on purpose and function, they can be categorized into different types such as bid bonds, performance bonds, advance payment bonds, quality assurance bonds, and maintenance bonds.
5. Flexibility: The letter can be issued and replied to in paper or digital formats, sent and received via mail or delivery, modified, extended, or revoked per mutual agreement or contract terms, and adjusted according to pertinent laws, regulations, and commercial practices in different regions.

Functions of a Bank Confirmation Letter

In financial and audit fields, a Bank Confirmation Letter serves several important functions:

1. Validate Account Information: The letter verifies whether the bank deposits, loans, investments, guarantees, etc., of the audited enterprise align with bank records, checking for any falsehoods or omissions to ensure authenticity and completeness of account information.
2. Ensure Transaction Security: It protects the interests of both transaction parties, preventing risks or losses arising from incorrect or changed account information, thereby enhancing the transaction's trustworthiness and efficiency.
3. Provide Audit Evidence: The letter offers sufficient and appropriate audit evidence to the auditor to lower inspection risks to an acceptable level, supporting the issuance of audit opinions.

Types of Bank Confirmation Letters

Based on purpose and content, Bank Confirmation Letters can be categorized as follows:

By Business Type

1. Bank Confirmation Letters for financial statement audits, primarily to validate bank deposits, loans, investments, guarantees, etc., providing audit evidence.
2. Bank Confirmation Letters for capital verification, mainly to confirm the investment status of the entity being audited, providing verification reports.
3. Other types, mainly serving to protect transaction interests by preventing risks or losses due to incorrect or changed account information.

By Response Method

1. Active Bank Confirmation Letters require the bank to confirm or fill in the listed information in the inquiry letter and explicitly reply if consistent or not.
2. Passive Bank Confirmation Letters require the bank to reply only if the information listed in the inquiry letter does not match their records.
3. Hybrid Bank Confirmation Letters ask the bank to actively confirm some information and passively confirm other details.

By Transmission Method

1. Paper Bank Confirmation Letters are sent and received via mail or delivery, with an official stamp.
2. Digital Bank Confirmation Letters are transmitted through email, web platforms, mobile apps, etc., using digital signatures for security and validity.

Bank Confirmation Letter Processing Procedure

The processing procedure may vary depending on the business type, bank institution, and letter method, but generally includes the following steps:

1. The applicant (e.g., an audited unit, investor, etc.) submits an application to the issuer (e.g., a bank or financial institution), indicating the project, amount, date, etc., to be confirmed and providing relevant supporting materials like seals, reserved seals, and authorization letters.
2. The issuer verifies the applicant’s account, transaction, balance, etc., and decides whether to issue the letter based on its fee standards and management policies.
3. The issuer fills in the required details in the letter, such as issuer name, recipient name, confirmation details, date, statement of authenticity, etc., with signatures from the handler and reviewer, and the issuer’s official stamp.
4. The issuer sends the confirmation letter directly to the recipient (such as an accounting firm or auditor) and retains a copy, operational records, or image files.
5. Upon receipt, the recipient verifies and evaluates the letter's contents. If any questions or discrepancies arise, the recipient can contact the issuer for explanations or supplementary information.