scholarly journals PREVENTIVE MEASURES TO MITIGATE THE RISK OF FRAUD IN LETTERS OF CREDIT TRANSACTIONS IN MALAYSIA

2021 ◽  
Vol 12 (Number 1) ◽  
pp. 27-49
Author(s):  
Rushmila Bintay Rafique ◽  
A. Vijayalakshmi Venugopal
Keyword(s):  
Preventive Measures ◽  
Credit System ◽  
Letter Of Credit ◽  
Full Compliance ◽  
Global Standards ◽  
Depth Analysis ◽  
International Trading ◽  
Standard Of Practice ◽  
Letters Of Credit ◽  
Primary Focus

This article attempts to analyse the issue of fraud in letters of credit (LC) transactions, also known as documentary credits. There are numerous reported cases of fraud in LC transactions, which remain a continuing risk. The UCP 600 is a popular standard of practice for banks, which confirms that banks must honour payment to the seller upon full compliance with the documentary credit requirements. Such payments have been made despite being presented with falsified documents or substandard goods being delivered. It might not be realistic to expect that the International Chamber of Commerce (ICC) can create global standards relating documentary credits, which cover the practicalities of the existing system and relevant legalities applicable to the letter of credit system in international trading. Each party involved may have a responsibility to take some preventive measures to mitigate the risk of fraud. The doctrinal method is used to conduct this study because it involves an in-depth analysis of the gap within the Malaysian system and the strategies that maybe be adopted to overcome the risks associated with LC fraud. Findings reveal that LC documents can be easily falsified, and the occurrence of LC fraud is not uncommon in Malaysia. However, given the lack of literature it has not been highlighted in the past couple of years. The primary focus of this article is to suggest preventive measures that the respective parties could take to protect themselves from fraudulent dealings involving LCs.

scholarly journals Use of Letter of Credit Form of Settlements in Ukraine

2020 ◽  
Vol 24 (1) ◽  
pp. 39-44
Author(s):  
A. Burkovskaya ◽  
◽  
V. Pavlenko ◽  
Keyword(s):  
Foreign Trade ◽  
Technological Progress ◽  
Trade Agreements ◽  
Credit System ◽  
Letter Of Credit ◽  
Goods And Services ◽  
Current State ◽  
National Bank ◽  
Letters Of Credit ◽  
The Impact

Annotation. Introduction. The current state of Ukraine’s development provides broad conditions for enterprises in world trade, so the question arises how to minimize the risks of trade operations. The presence of risks and an unstable external environment can lead to non-fulfillment of obligations by the parties to the contracts. Therefore, the study of the letter of credit system for services is relevant because it will be able to ensure minimal cost risk. Purpose. The purpose of this article is to study the letter of credit as one of the reliable mechanisms for payment of foreign trade operations, and its use in Ukraine. Results. The article examines and investigates the system of letter of credit and its use in Ukraine. The main regulations on the regulation of letter of credit calculations are considered. The main advantages of the letters of credit are defined. The main stages of letter of credit conclusion are systematized. The impact of scientific and technological progress on the simplification of letters of credit is considered. Systematized main types of letters of credit and their classification. Conclusions. Using a letter of credit as a method of payment for goods and services will minimize the risks of both the seller and the buyer. In turn, the reform of the National Bank of Ukraine will allow the letter of credit to gain popularity and possibly become the main means of payment for foreign trade agreements. Keywords: letter of credit; form of calculations; obligation of the parties; types of letters of credit; basic regulations.

Part I Legal and Practical Challenges to Traditional Trade Finance, 7 Letters of Credit and Stop Payment Orders Made in the Issuer’s Country

2021 ◽  
Author(s):  
Enonchong Nelson
Keyword(s):  
Common Law ◽  
Critical Examination ◽  
Letter Of Credit ◽  
Rome Convention ◽  
The Us ◽  
The Law ◽  
Letters Of Credit ◽  
Contractual Obligations ◽  
Rome I ◽  
Made In

This chapter offers a critical examination of the significant, but largely unexplored, question whether, and to what extent, a foreign order restraining the issuing bank from making payment under a letter of credit can afford the issuing bank a good defence to a claim in a court outside that bank’s home jurisdiction. At common law, in England as well as in other jurisdictions, such as Hong Kong, Singapore and the US, such orders have only limited effect in the forum. This chapter argues that the approach of the English courts to article 4 of the Rome Convention of 19 June 1980 on the law applicable to contractual obligations meant that such orders could defeat a claim against the issuing bank in England only in very narrow circumstances. It goes on to examine the extent to which the changes introduced in article 4 of the Rome I Regulation of 17 June 2008 on the law applicable to contractual obligations have altered the position under English law, so that stop payment orders made in the issuer’s home jurisdiction may now have a much wider reach in England. The chapter contends that notwithstanding the amendments to article 4, in the specific context of letters of credit, the approach of the English courts under the Rome I Regulation is likely to be broadly similar to that under the Rome Convention. The Rome I Regulation has not (even unintentionally) opened the door to stop payment orders made in the issuer’s home jurisdiction.

Part I Legal and Practical Challenges to Traditional Trade Finance, 3 Soft Clauses in Letters of Credit

2021 ◽  
Author(s):  
Davies Martin
Keyword(s):  
Trade Finance ◽  
Letter Of Credit ◽  
Exchange Time ◽  
The Past ◽  
Blockchain Technology ◽  
The Future ◽  
Letters Of Credit

Soft clauses in letters of credit make the issuing bank’s obligation conditional upon some event or certification that is in the control either of the applicant, or some agent, entity, or organisation in the applicant’s country. Such clauses make an apparently irrevocable letter of credit into what is, in essence, a conditional undertaking dependent on the applicant’s approval. Soft clauses are not always a vehicle for fraud—there may be genuine reasons for their inclusion—but they certainly make it easy for an applicant to ensure that the issuing bank does not pay the beneficiary. This chapter will consider the problems caused by the use of soft clauses, some possible solutions, and it will suggest alternatives, some of which look to the past (bills of exchange/time drafts), some to the present (open account and standby letters of credit), and some to the future (the advent of blockchain technology).

scholarly journals A New Method for Computing Letter of Credit Risks

SAGE Open ◽  
2020 ◽  
Vol 10 (4) ◽  
pp. 215824402097021
Author(s):  
Cheng Zhang ◽  
Ni Hu
Keyword(s):  
Factor Analysis ◽  
Quantitative Method ◽  
Credit System ◽  
Letter Of Credit ◽  
Credit Risks ◽  
Confirmatory Factor ◽  
System Risk ◽  
Chinese Export ◽  
Main Factors ◽  
And Control

This study targets problems in the risk assessment and control processes of letter of credit settlements for Chinese export enterprises. It applies the quantitative method of exploratory factor analysis to extract the main factors and uses a confirmatory factor analysis to test the validity these constructs. VENSIM software is used to design the system dynamics causal tree and flowchart of the letter of credit system. The equation sets of DANAMO parameters are then constructed using the software. Finally, through analysis of the system risk fluctuation diagram with system simulation, it offers enterprises advice on how to identify potential risk points to prevent and control letter of credit risks in advance.

scholarly journals THE TWO IMPORTANT DOCTRINES UNDERLYING DOCUMENTARY LETTERS OF CREDIT AND THE FRAUD EXCEPTION

2008 ◽  
Author(s):  
Tenielle Appanna
Keyword(s):  
International Trade ◽  
Letter Of Credit ◽  
Fraud Exception ◽  
Letters Of Credit

Documentary letters of credit are important tools in relation to international trade. The parties who make use of these instruments usually come from different countries and usually have different views on trade and customs. The parties generally do not know each other personally and have opposite interests in relation to the contract of sale. There is a sense of distrust towards each other, as both parties have serious concerns as to the other’s performance in terms of the contract. While the purchaser has a fear of receiving goods of an incorrect quantity or quality, or not receiving goods at all, the seller fears non-payment, or that the buyer refuses to accept the goods on a mere technicality. Coupled with the abovementioned is the fact that legal recourse will be expensive and may be complex taking jurisdiction into consideration. A documentary letter of credit eases some of these fears due to the unique doctrines which form the foundation of this instrument, and these will be discussed at length. The most frequently encountered exception to documentary letters of credit not being fulfilled is that of fraud, which will also be discussed at length.

scholarly journals Autonomy Principle and Fraud Exception in Documentary Letters of Credit, a Comparative Study between United States and England

2015 ◽  
Vol 15 (2) ◽  
pp. 47-68 ◽  
Author(s):  
Hamed Alavi
Keyword(s):  
International Trade ◽  
Common Law ◽  
Legal Aspects ◽  
International Operation ◽  
Legal Personality ◽  
Letter Of Credit ◽  
Law System ◽  
American Law ◽  
Standards Of Proof ◽  
Letters Of Credit

Abstract Despite the fact that Documentary Letters of Credit are involved in process of International Trade for many centuries, but their legal personality is very new and their life span is much shorter than their existence. In the middle of Eightieth Century, Lord Mansfield introduced legal aspects of LC operation for the first time to the Common Law System. Later, International Chamber of Commerce started to codified regulations regarding international operation of Documentary Letters of Credit in 1933 under the title of Uniform Customs and Practices for Documentary Letters of Credit and updated them constantly up to current date. However, many aspects of LC operation including fraud are not codified under the UCP which subjects them to national laws. Diversified nature of National Laws in different countries can be source of confusion and problem for many businessmen active in international operation of Documentary Letters of Credit. Such differences are more problematic in Common Law countries as a result of following precedent. For Example, legal aspects of International LC transactions under British Law are only based on case law, however, American Law addresses Letter of Credit Operation under Article 5 of Unified Commercial Code. Due to important role of English and American law in practice of international trade, current paper will try to compare their approach to autonomy principle of in LC operation, fraud rule as a recognized exception to it and search for answer to following questions what is definition of fraud, and what are standards of proof for fraud in LC operation, under English and American law?

Fraud in the documents and the underlying contract in letters of credit under Jordanian and English law: a new prerequisite?

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Kamal Jamal Alawamleh ◽  
Shadi Helo Abu Helo
Keyword(s):  
Design Methodology ◽  
Secondary Data ◽  
Specific Area ◽  
Main Method ◽  
Content Type ◽  
Letter Of Credit ◽  
Important Principle ◽  
English Law ◽  
Fraud Exception ◽  
Letters Of Credit

Purpose This study aims to examine the application of the fraud exception to the autonomy principle that governs the work of letters of credit in both Jordanian and English law. While it has been reiterated that the application of such exception before the English courts is difficult, this study highlights and critically analyzes some of the reasons that lie behind such a difficulty. Moreover, this study compares the English approach with the Jordanian approach to this specific area of law to find out what each can benefit from the approach of the other. The extent to which both approaches have been successful in applying such an exception will be examined thoroughly in this paper. Design/methodology/approach To examine how effective is the approaches followed by the English and Jordanian Courts in applying the fraud exception in this context, this work makes use of the secondary data available in this regard as the main method to complete such an examination. By critically analyzing and comparing the various data contained in these sources, this work identifies the problems associated with such approaches. Findings This work suggests that while the autonomy principle in letters of credit has what shall maintain its role as an important principle, the fraud exception application shall be facilitated. It further submits that the English Courts attitude to this specific area of law is somehow ambiguous and intertwined as it does not distinguish between two different stages that are existent in this context, namely, the submission of the documents stage “the prerequisite” that in case of submitting genuine, truthful and complying documents would activate the autonomy principle and the following stage which starts after activating the autonomy principle and which to it a fraud exception can be applied. Originality/value This work proposes that a beneficiary of a letter of credit shall satisfy a prerequisite before it can be said that he is protected under the autonomy principle. Such a prerequisite dictates that he shall submit genuine, truthful and complying documents to activate the autonomy principle and once the beneficiary submits such documents it can be said that the autonomy principle, which fraud is an exception to it, has been activated. Furthermore, this work proposes that English Courts shall adopt an approach similar to the Jordanian approach in relation to the application of the fraud exception, whereas the latter requires proving neither the beneficiary’s fraudulent intent nor his knowledge of it but rather applies a more realistic test concerned merely with the goods’ quality and quantity.

Integrated Web-Based Letter of Credit System : Today's Opportunity , Tomorrow's Urgency

2014 ◽  
Vol 2 (6) ◽  
pp. 57-66
Author(s):  
Sanaz Nikghadam Hojjati ◽  
Fatemeh Soleimani Roozbahani ◽  
Mohammad Reza Yavarzadeh
Keyword(s):  
Credit System ◽  
Web Based ◽  
Letter Of Credit

scholarly journals Risk Analysis in Documentary Letter of Credit Operation

2017 ◽  
Vol 0 (0) ◽  
Author(s):  
Hamed Alavi
Keyword(s):  
Risk Management ◽  
International Trade ◽  
Risk Analysis ◽  
Current Paper ◽  
Management Theory ◽  
Letter Of Credit ◽  
Legal Principles ◽  
Strict Compliance ◽  
Letters Of Credit

Abstract Documentary Letters of Credit are among most popular methods of payment used in international trade. They function as an irrevocable promise of issuing a bank to pay instead of an applicant buyer to a beneficiary seller under the condition that the beneficiary presents complying documents with terms and conditions of the credit to the bank. One of the reasons for the popularity of the LCs in international trade is shifting the payment risk from an individual buyer to a bank with a much stronger financial standing. However, LC operation in international trade is not free of risk. Despite the fact that two main principles of the Documentary Letter of Credit’s Operation (Principle of independence and principle of strict compliance) facilitate the process of international trade significantly, but still all parties involved in LC operation are supposed to be cautious about the existing risks relevant to their role in LC operation. Current paper tries to use legal principles of documentary credits and risk management theory in order to define existing risks to each party (beneficiary, applicant and bank) in international LC transaction and find an answer to the question of what are exposing risks for involved parties? For this purpose, the paper starts with an explanation of the two main principles of LC operation and moves forward with using the risk management theory to explain existing risks for each party in detail.

Managing money laundering risks in commercial letters of credit

2016 ◽  
Vol 19 (2) ◽  
pp. 158-168
Author(s):  
Ramandeep Kaur Chhina
Keyword(s):  
Money Laundering ◽  
Regulatory Requirements ◽  
Trade Finance ◽  
Content Type ◽  
Letter Of Credit ◽  
Commercial World ◽  
Proceeds Of Crime ◽  
Letters Of Credit ◽  
The Uk

Purpose The purpose of this paper is to critically examine the role of banks in detecting and mitigating money laundering risks in trade finance activities, especially in commercial letters of credit, and to answer the central question: do banks comply with regulations that are inadequate (if so, is more stringent regulation compatible with the commercial world of trade finance?), or are banks are in danger of non-compliance? Design/methodology/approach The relevant principles promulgated by international organisations as well as the law enacted in UK to prevent money laundering risks in commercial letters of credit was examined to assess banks’ compliance with their anti-money laundering (AML) obligations. The key provisions of the Money Laundering Regulations 2007, Proceeds of Crime Act 2002 and the Wolfsberg Trade Finance Principles were discussed, and the extent of banks’ compliance with these provisions was highlighted by carefully analysing the steps a bank might take at various stages of the operation of a commercial letter of credit and what the banks in fact do. The paper relies heavily on the findings of the recent study conducted by the Financial Conduct Authority (UK) to analyse the actual practice followed by UK banks in controlling money laundering risks in transactions involving commercial letters of credit. Findings The paper establishes that considering the formal nature of commercial letters of credit (which makes them independent from the underlying transaction), any stringent measures to regulate trade finance activities of a bank may destroy the effectiveness of commercial letters of credit as a tool for promoting international trade. The current law and regulations together with the Joint Money Laundering Steering Group Sectoral Guidance and the Wolfsberg Principles provide the requisite legal and regulatory framework to control money laundering risks in commercial letters of credit. The paper however establishes that the majority of banks in UK currently appear to be in danger of non-compliance with the UK AML regime and certainly need to meet their AML obligations in a more serious way. Practical implications The findings may influence banks to adopt a more vigilant approach in their trade finance activities and to undertake more responsibility in ensuring compliance with the current AML law and regulations, while highlighting that their current practice may put them in danger of non-compliance. Originality/value The paper demonstrates in an exceptional way the legal and regulatory requirements for banks to prevent money laundering risks in their trade finance activities and where, in practice, the banks are falling short of compliance with these requirements. By adopting a step-by-step approach in evaluating banks’ “current-and-must have” approach to controlling money laundering risks at various stages of a commercial letter, the paper makes a valuable contribution to the study of combating money laundering in commercial letter of credit transactions.

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