A Survey On The Letter Of Credit Fraud And Related Laws And Regulations

Letter of credit is a letter from a bank guaranteeing that a buyer's payment to seller will be received on time and for the correct amount. As the banker's credit is used instead of commercial credit, which means that while the document is conforming to the provisions of the letter of credit, the bank will bear the payment responsibility first, hence an unparalleled advantage over payment by remittance or payment by collection. For this reason, letter of credit helps to provide safer payment for both the buyer and the seller, and it has been used extensively as the most frequently used way of payment in international transactions since it first came into use. Statistics show that 90% of the world's trade, and over 80% of China's foreign trade is paid in letter of credit.However, the recent years have witnessed frequent occurrence of letter of credit fraud, which seriously affects the confidence of both buyers and sellers on letter of credit, and in turn undermines the practices in international trade. In the year 1993, for example, the world's largest automobile manufacturer- General Motors, suffered from a loss of $ 426 million in a carefully planned letter of credit fraud. Similarly, the so-called "master piece in 1990s"of credit card fraud cost the Salvation Army $ ten million, but the Salvation Army, as a victim of the scheme involving fraudulent trading and standby letters of credit, is only one of a growing number of victims worldwide. In other words, by exploiting the characteristics of the transaction with L/C, some outlaws colluded together and fiercely committed cheating behaviors in all the operative parts of L/C, which caused a great economic loss to the persons who have rights, affected the normal development of enterprises, brought about the damage in bank's credit and in the order of transaction, and endangered the L/C system. Consequently, strong measures have been taken in all countries in order to prevent from this fraud, including some laws, regulations, and special institutions for prevention of letter of credit fraud.For the reasons above, it is of great necessity to legislatively make up related rules to prevent from and fight against these illegal practices. The law on L/C is attached great importance in the world. In many other countries, there have proclaimed special laws on letter of credit, including the well-known Uniform Commercial Code in the United States, with its Article 5 on letter of credit. In China, however, despite the fact that 80% of China's foreign trade is paid in letter of credit, there has never been a specialized law or regulation on letter of credit, with the exception of Transaction with Letter of Credit in Domestic Trade, issued by the People's Bank of China in 1997,which does not apply to payment in international trade. This lagging in legislature makes it possible for outlaws to turn to L/C fraud. According to statistics, the volume of foreign trade yet to be paid in China's export has reached 10 billion U.S. dollars, among which as high as 60% should be counted as hostile fraud. Chinese banks have to pay several million yuan every year because of L/C fraud, and it is difficult to estimate the value being cheated by L/C fraud each year. Meanwhile, since becoming a full member of the WTO, China has seen a significant increase in the volume of foreign trade, which may lead to the growing possibilities and complexity in the occurrence of L/C fraud, and in turn the urgency of further investigation into the characteristics of L/C fraud.As well as a brief introduction of the concept, nature, characteristics, and functions of L/C, this thesis gives the concept, cause, categories, and harm of L/C fraud, with the main focus on the research on preventions against L/C fraud by giving a contrastive analysis between the legislative and judicatory systems related to L/C fraud in western countries and those in China. Through comparative and analytical approaches, the thesis further provides an investigation into regulations regarding L/C fraud in China's criminal law, ci...