The Characteristics And Prevention Of Letter Of Credit Fraud

The British created letters of credit more than 100 years ago. With the rapid development of international trade, the letter of credit has become the most important tool used by international finance and trade bodies to settle accounts. At the same time, letter of credit fraud is quietly increasing in frequency and scope. After the establishment of the reform and opening policy during the 3rd session of the 11th plenary meeting of the Chinese Communist Party and our country's renewed vigor toward international trade, letters of credit entered into Chinese financial markets. Therefore, to us letter of credit fraud is a relatively new type of financial crime, and academic study of the topic is not yet sufficient. The author believes that letter of credit fraud is an economic crime that is closely tied to the current economic situation, and thus the study of it must be based solely upon the current characteristics of the crime in order to develop effective countermeasures against letter of credit fraud. The paper is composed of four parts: The first part is a summary of letter of credit fraud. Firstly, through analysis of letter of credit fraud the author composes a definition of the crime. Letter of credit fraud is engaged in with criminal intent. It can be accomplished through forgery, alteration of documents, the use of invalid letters of credit, and deception in obtaining valid letters of credit. The goals of these activities are to defraud merchants of their goods or banks of their money, and because of the amounts involved the damage to society is great. Secondly, the various forms of letter of credit fraud are analyzed. Using different standards, the ways of committing letter of credit fraud are made clear. Understanding the basic types of letter of credit fraud helps us to find the key points in real-world fraud cases. The second part is regarding the characteristics of letter of credit fraud. Any crime is a reflection of numerous negative factors within society, and letter of credit fraud is no exception. It is the result of the current economic situation and society in part embodies its characteristics. The author specifically analyzed the following: (1) Cases involve large sums of money. The value of international trade contracts is frequently more than $1 million. Therefore, once letter of credit fraud occurs, not only is harm done to our nation's financial markets and our banks' prestige, but also can result in the loss of public assets, the consequences of which are very serious. (2) Letter of credit fraud is complex. Because we must use letters of credit, the author believes that since the credit system is complex then so to is the defrauding of that system. First, letters of credit are independent of the basic trade contract. Second, payment on letters of credit involves bank credit. Finally, any financial work has many steps and involves many parties. (3) Letter of credit fraud is international. Because letters of credit are primarily used to settle international trade and international trade involves at least two countries, the applicant and beneficiary are located in different countries. Thus, perpetrators of letter of credit fraud use international trade as a cover for their activities. (4) Letter of credit fraud involves multiple violations of the law. It breaks both civil and commercial law and thus has aspects of both as it violates commercial agreements and infringes upon civil rights. It also involves the criminal laws of affected nations, causing harm to society and constituting a criminal offense. The third part analyzes the reasons that letter of credit fraud exists. The author expounds on four principle aspects: (1) Processing reasons. "Uniform Customs and Practices for Documentary Credits" (UCP500) is extensively used throughout the world. However, the UCP500 is not universal and has its own flaws. First, the independence principle means that banks are only concerned with the documents, not if the goods are actually shipped and of the specified quality. Secondly, the strict conformance principle means that if the documents presented conform to the requirements stipulated in the letter of credit, banks must pay the seller for the value of the goods, and do not have to make certain that the documents are real. Therefore, if criminals are able to forge letters of credit or other documents it is quite possible for them to commit fraud. Third, UCP500 doesn't define letter of credit fraud and doesn't have any measures toprotect against it. Thus, parties encountering problems with UCP500-based letters of credit cannot easily resolve those problems through legal means. (2) Economic reasons. Economic benefits are a limited social resource and are distributed unequally. Originally letters of credit were a means to acquire such benefits legally, but they are now being used by criminals to acquire benefits illegally. The author believes: 1. As international trade increases, so to does letter of credit fraud. 2. Because of governmental fiscal restrictions it is increasingly difficult to get loans, so companies turn to fraud to raise capital. 3. The pressure to revalue the RMB is great as is the pressure to increase imports, which the defrauder can take advantage of. 4. Under market economy conditions, huge potential profits and low operational costs encourage the criminal. (3) Social reasons. The author believes social reasons stem from two main aspects: First, people are not as vigilant toward this sort of fraud, and second our internal financial systems also have problems which create opportunities for fraud. (4) Legal reasons. It could be said that the most important reason for rampant letter of credit fraud is that legal means to combat are not legislated fully and those means that are legislated are not fully used. Our country's police, prosecutors and judges have different ideas on how to defeat this type of fraud and are using different methods. The emphasis is on recovering the money, not punishing the criminals, and they regard economic fraud as a purely economic dispute. At the same time, every nation's laws are different and have problems involving national jurisdiction, application of law, etc. International investigations are complex and expensive and cannot violate other countries' jurisdiction. The fourth part involves how to prevent letter of credit fraud. In accordance with the reasons for letter of credit fraud, the author believes that the following methods can prevent the fraud from occurring: (1) Fix the flaws in the international letter of credit system. Specifically, accept and use the "fraud exception principle", and actively use electronic letter of credit systems. (2) Enhance people's knowledge of the letter of credit system. There are...