A Study On Fraud In Letter Of Credit And Bank Risk Prevention

Letter of credit is deemed as the life blood of international commence, realizing the transformation from commercial credit to banking credit. The Uniform Customs and Practice for Documentary Credit (UCP600) published by International Chamber of Commerce (ICC) in2007, leads the processing of letter of credit and is accepted by the banks and the merchants. The usefulness and efficacy of the letter of credit is independent from the underlying relationship between importer and exporter. However, in a number of cases, the independence of the letter of credit led to the fraud in the underlying transaction. The gigantic benefits make the bank, buyer or seller take part in the fraud transaction, which greatly impairs the development of letter of credit and the international commerce.At present, there are no common rules about the fraud in letter of credit and its remedy. When the fraud happened, people could use the bank remedy (i.e. bank rejection) and the judicial remedy (i.e. court injunction or freezing order) to claim for losses.In addition, the fraud exception rule of letter of credit is widely accepted, which embodies the protection of the interests of bona fide third person, but only to the issuing bank/confirming bank and the applicant.Banks around the world should attach importance to preventing the risk of fraud in letter of credit, both the internal control and the external management. However, with the diversification of international trade, new methods of fraud updates so quickly that it is difficult for the bank to distinguish the fraud in letter of credit. Therefore, it is essential and significant to recognize and prevent the fraud in letter of credit, to safeguard the bank’s assets and even maintain its fame.The paper is divided into five parts. The first part introduces the related concepts of letter of credit. Then, the reasons and the classifications of fraud in letter of credit are analyzed through the angle of the applicant, the beneficiary and the bank. Thirdly, the author discusses the peculiarity and the harmfulness of fraud in letter of credit. Fourthly, remedies of the fraud in letter of credit are pointed out. At last, the author introduces the external management, the internal management and the idiographic actions of bank M about the prevention of fraud in letter of credit.