Documentary letter of credit fraud risk management

Abstract

Purpose

The purpose of this paper is to explore and examine, in a systematic manner, possible preventive measures that commercial parties can take in order to prevent or reduce documentary letter of credit (L/C) fraud in international transactions.

Design/methodology/approach

In the context of international transactions, considering documentary L/C fraud as a risk, the paper searched preventive measures that different parties involved can adopt, from both business perspective and legal perspective.

Findings

The paper provides a number of specific measures which buyers, sellers, and banks in international L/C transactions can take in business to reduce L/C fraud. The option of banks providing additional services of checking further the validity or authenticity of some documents under the L/C, by charging additional prices, has reflected the needs of some business parties. However, this is proposed to be optional rather than compulsory for banks. The lawyers can also play an important role by adopting preventive legal mentality to help and provide advice to different parties in applying the preventive and proactive approach. More importantly, the author recommends that buyers or sellers maintain close cooperation with their banks and lawyers in implementing preventive and proactive measures.

Practical implications

The paper can be a helpful source of advice for business enterprises likely to be involved in international documentary L/C transactions.

Originality/value

This paper fulfils the gap of a holistic study on how to prevent international documentary letter of credit fraud.

Citation

Zhang, Y. (2012), "Documentary letter of credit fraud risk management", Journal of Financial Crime, Vol. 19 No. 4, pp. 343-354. https://doi.org/10.1108/13590791211266340