Some Legal Issues On Credit Fraud

The letter of credit (L/C) is one type of trade finance settlement emerging in the international trade which has developed to a certain extent. According to UCP600, credit means"any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation."Since it is a kind of payment involved in bank trust and is more reliable to the two parties in the international transaction, letter of credit has been widely used nowadays. However, with the trade grows rapidly, the credit fraud is increasingly rampant. There is no defination of credit fraud in the latest UCP600 published by ICC for the reason of understanding variance of various countries in the world, and consequently there is no uniform regulation on it which could be applied all over the world. Credit fraud is not defined specificly in statute law or case law of anglo-american law system countries, where courts normally apply the fraud defination in the civil and commercial cases to the credit fraud cases. The same also happens in the continental law system countries, where courts normally apply the defination of fraud in the civil law to credit fraud. In this paper, credit fraud means one party abuses the indenpendence principle of the credit, leading to the loss of the fundamental interests of the other party or the main purpose of the contract not be realized by forging or falsifying the documents under the credit, opening the credit with soft terms and conditions, or obtaining the goods or the payment through false trade. The fraud of credit can be categoried into different types with different criterions, however, the basic characteristic is the abuse of the principle of strict compliance between documents and credit and the principle of payment against documents. There are five specific factors for the existence of credit fraud, the character of the credit system itself, the variance in juridic comments of every country, the character of'two low and two high'of fraud result, complexity of the relations in underlying contracts and lack of specialty knowledges of international trade staff. Discriminating the fraud actor and content, there are fraud by beneficiary, fraud by applicant, fraud by beneficiary and applicant, document fraud, credit fraud and underlying contract fraud.The constitution of credit fraud has several essentials: 1. the actor, whether a person or an organization, shall have the capacity of intention; 2. credit fraud is an intentional act, and therefore the actor should have the fraud intention, which includes two sides, one is to intend others'understanding mistake, and the other is to intend others'corresponding act upon the mistake understanding; 3. there is solid evidence that the actor does the fraud by credit mechnism, i.e. the confirmation of the credit fraud should be built or confirmed by solid evidence, the other party can not be confirmed to fraud just on ground of suspicion or claims; 4. such fraud is an essential fraud which the frauding party's deeds leading to a loss of fundmental contract interests or the main purpose of the contract going to nothing.The priciple of independence is subject to a fraud exception which allows the bank to properly dishonor a letter of credit, or allows the bank or the parties to request the court injuction to require the bank to dishonor a letter of credit, in cases of fraud or forgery, even if the documents presented to the beneficiary appear to comply with the terms of the credit. This exception does not constitute a denial of the priciple of independence, but to distern the priciple in case of fraud based on solid evidence. The exception principle has several characters: 1. it is applied flexibly, which leads to judge's free decisions; 2. the independence principle should also be taken into account when applying the exceptence principle while balancing every behalfs; 3. there is no uniform standard in the international practice, so appliance of this principle shall be subject to demestic laws; 4. appliance of this principle is a kind of jurisdiction means of a country in order to balance the behalfs which cannot be solved in the economic field. The legislation objective is to balance the rights and obligations both of the beneficiary and applicant, which could radically maintain the independence priciple of credit and promote the prosperous development of international trade. Its use should follow substantial and procedural requirements. The issuing bank or the harmed party in credit fraud has the right to apply to the exceptence principle, however, it should be applied before undertaking of the payment in bank case. Though it's widely accepted by many countries, it's not without restrictions, i.e. the fraud exception can not be cited against the innocent beneficiary or innocent letter holder.The judicial remedy to the credit fraud mainly means injuctions, including Mariva Injuction of Britain and the preservatory measures in civil law contries. But we do not have a systematic set of rules about the letter of credit fraud and its remedy. On the substancial side, the stupilations about credit fraud in Criminal Law involve the penalty to the crime and the monetary remedy attached, while some basic doctrines in the General Priciples of the Civil Law, plus the rules of preservatory measures in the Civil Procedure Law, along with those in The Rules about Some Problems Arising in the Letter of Credit Law by the Supreme People's Court. Cases make the main body of substancial civil rules about the fraud and its remedy. On the procedure side, courts mainly use those rules in the Criminal Procedure Law and the Civil Procedure Law and The Rules about Some Problems Arising in the Letter of Credit Law by the Supreme People's Court. With the expand and development of our country's international trade transactions and the confirmation of the letter of credit system in the international trade finance, lack of legislation on the credit system regulation does not only not comply with the present international practice but also not adapt to the development of our country's international trade. In judicatory practice, we still lack a preservatory injuction system while we have the problems in leaving out parties, lacking an objective criterion about the definition of fraud, the unreasonable evidence burden to confirm fraud, the neglect of innocent third parties, as well as the neglect of fraud exception rule. In this paper, we insist the priciple of good faith, balancing the interests, and: 1. to complete the statutory system of anti-fraud; 2. to improve the preservatory remedy; 3. to correctly cite the priciple of fraud exception; 4. to clarify the proving criterion and burden of proof; 5. to improve the procedure system of judicial remedies for credit fraud; 6. to build the immunity priciple of the fraud exception rule.