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Article
Publication date: 4 May 2012

Ali Polat

This paper seeks to examine the differences between traditional documentary credits and corporate issued documentary credits and to show the effects of these differences…

Abstract

Purpose

This paper seeks to examine the differences between traditional documentary credits and corporate issued documentary credits and to show the effects of these differences on the application of documentary credits within a fraud context.

Design/methodology/approach

The objective of the paper is achieved by analysis of relevant documents of related institutions together with some examples of works done by the authors from the field.

Findings

It is found that the documentary credits issued by corporations can be a tool for financial fraud due to lack of information in classifications and lack of experience for this product.

Practical implications

Companies dealing with international trade can benefit from the risk involved in that type of transactions. It is also possible that a new classification can also be arranged including corporate letters of credits.

Originality/value

The paper covers a topic which is almost untouched. As the number of documentary credits that are issued by corporates are rare and this is not also well documented in the theory was shown by this research. The absence of the information in theory and practice gives room to the fraudster.

Details

Journal of Financial Crime, vol. 19 no. 2
Type: Research Article
ISSN: 1359-0790

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Article
Publication date: 5 June 2020

Zaid Aladwan

The purpose of this paper is to examine the application of the fraud exception rule and try to analyze the different approaches in regard to the implication of fraud rule…

Abstract

Purpose

The purpose of this paper is to examine the application of the fraud exception rule and try to analyze the different approaches in regard to the implication of fraud rule in letters of credit. Further, this paper tries to explore if there is an obstacle when applying such exception rule in common law and whether there is an overlap with interpreting the said rule. The same fact appears in civil law courts as well.

Design/methodology/approach

This paper is a comparative study which uses analytical approach and critical legal thinking.

Findings

The scope of the fraud defence, the US legal systems demonstrate that the scope of the fraud rule is extended and covers both fraud in documents and fraud in the underlying contract, while in contrast, in UK the rule’s scope is restricted to fraud in documents only. Such an approach is reasonable, as it is justified by applying the Uniform Customs and Practice for Documentary Credits (UCP) rules strictly. That is to say, English courts apply the rules literally, even if it does not lead to fair judgements, while in contrast, American courts seek to enforce justice even if it goes beyond the rules. In any case, restricting the fraud exception to fraud in the documents is the proper approach. The reason for such restriction, on the one hand, is to maintain the integrity of letters of credit and, on the other hand, to affirm the autonomy principle.

Originality/value

Extending the scope of the fraud defence will require banks to go beyond the documents, which is not logical. Banks are neither expert in such transactions nor required to do so. Most importantly, banks are concerned with documents only; it is for the court to go beyond the documents. Although this approach could be criticized, it is important to ensure that the validity of the documentary credit instrument is not compromised. As established by academics, any argument need not engage the bank unless it is in respect of the presented documents. In short, “pay now, argue later” is paramount to distinguish parties’ litigations from banks vs parties’ litigations. In any case, it can be suggested that extending the fraud rule exception to include fraud in the underlying contract from Jordan perspective is not the proper one because it is necessary to maintain the integrity of letters of credit and to affirm the autonomy principle.

Details

Journal of Financial Crime, vol. 27 no. 3
Type: Research Article
ISSN: 1359-0790

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Article
Publication date: 14 June 2013

Umar Oseni

The purpose of this paper is to examine the current legal framework for payment system in international Islamic trade finance vis‐à‐vis the new regime introduced by the…

Abstract

Purpose

The purpose of this paper is to examine the current legal framework for payment system in international Islamic trade finance vis‐à‐vis the new regime introduced by the Uniform Customs and Practice for Documentary Credits (UCP) 600 as well as the Sharī'ah Standard on Documentary Credits issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Sharī'ah Resolutions of selected Sharī'ah Boards of Islamic financial institutions.

Design/methodology/approach

A partial comparison of both the UCP 600 and the Sharī'ah framework for documentary credit is given through the content analysis of relevant sources.

Findings

The AAOIFI Sharī'ah Standard on Documentary Credits, as well as other applicable Sharī'ah resolutions of Islamic financial institutions, does provide a good framework for a Sharī'ah‐compliant documentary credit system, which is unique to trade in Islamic finance products, but there is scope for further improvement, taking into consideration the two possibilities proposed in the available literature on the subject – harmonization or bifurcation of rules. The UCP 600 also allows for the exclusion or modification of the rules to suit the specific needs of the Islamic finance industry.

Research limitations/implications

This study focuses only on UCP 600 and the Sharī'ah framework on Documentary Credits, though bearing mind that there are other frameworks for documentary credit systems such as the International Standby Practices (ISP98) and letters of credit issued under Article 5 of the New York Uniform Commercial Code.

Practical implications

Islamic financial institutions should implement the provisions of the AAOIFI Sharī'ah standard on documentary credits but may require a different framework for international trade financing involving both Islamic banks and conventional banks.

Originality/value

Though few studies have been conducted on Sharī'ah issues regarding the application of the documentary credits, this seems to be the first time where a more proactive step is taken to propose two different frameworks for transactions involving Sharī'ah compliant financing.

Details

Journal of International Trade Law and Policy, vol. 12 no. 2
Type: Research Article
ISSN: 1477-0024

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Article
Publication date: 1 January 1988

Alan S. Wernick

Letters of credit are commonly used today to facilitate commercial transactions of all types between wary sellers and buyers, both of whom are, for one reason or another…

Abstract

Letters of credit are commonly used today to facilitate commercial transactions of all types between wary sellers and buyers, both of whom are, for one reason or another, reluctant to initiate the exchange of money for goods. A letter of credit may be either revocable or irrevocable. There are several types of letters of credit with varied applications. Letters of credit are one of many negotiating tools that a user can employ to minimize his or her risk in a computer systems acquisition.

Details

Library Hi Tech, vol. 6 no. 1
Type: Research Article
ISSN: 0737-8831

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Article
Publication date: 5 October 2015

Chang-Ryung Han, Hans Nelen and Matthew Youngho Joo

This paper aims to explore the feature and mechanism of a new type of documentary credit fraud that victimizes banks’ issuing letters of credit (L/C), harming neither the…

Abstract

Purpose

This paper aims to explore the feature and mechanism of a new type of documentary credit fraud that victimizes banks’ issuing letters of credit (L/C), harming neither the importer nor the exporter and seeks to suggest possible measures to tackle it.

Design/methodology/approach

This study analyzed 30 cases of documentary credit fraud against banks that were detected by the Korea Customs Service (KCS) and interviewed three key customs investigators to interpret the case reports more accurately and gain a deeper understanding into the mechanisms governing the fraud. This study draws on routine activity theory and crime pattern theory to analyze the opportunity structures of this fraud.

Findings

This study found that the importer that engaged in the fraud cases had established a solid business relationship with the exporter and had established trust with the victimized banks; the banks, despite the fact that they had their own risk management systems to screen out unqualified L/C applicants, were defrauded by the offending importers and exporters. Unlike ordinary documentary credit fraud, fraud against banks can be tackled by customs because the offender and the victim typically operate in the same jurisdiction, and this type of fraud often results in trade-based capital flight and money laundering, which is the target of customs enforcement.

Research limitations/implications

As this paper is based on case reports of the KCS, it is inappropriate to generalize the findings or to apply the findings to other contexts. Nevertheless, the opportunity structure elaborated upon in the course of this paper may prove useful in devising measures to tackle this type of fraud elsewhere.

Originality/value

Documentary credit fraud against banks is relatively unexplored, in particular from criminological perspective. This study can contribute to a refinement of the application of opportunity perspective to white-collar crime.

Details

Journal of Money Laundering Control, vol. 18 no. 4
Type: Research Article
ISSN: 1368-5201

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Article
Publication date: 1 July 1985

K.A. Dewdney

The letter of credit is commonly utilised when an exporter has doubts regarding the prospects of receiving payment. It is essential that all possible precautions are taken…

Abstract

The letter of credit is commonly utilised when an exporter has doubts regarding the prospects of receiving payment. It is essential that all possible precautions are taken to ensure that the letter of credit's conditions can be met and are conformed with. If documents are rejected, if it is possible for them to be corrected and returned to the advising bank within the expiry date, then this should be done.

Details

Industrial Management & Data Systems, vol. 85 no. 7/8
Type: Research Article
ISSN: 0263-5577

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Article
Publication date: 5 October 2012

Yanan Zhang

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…

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.

Details

Journal of Financial Crime, vol. 19 no. 4
Type: Research Article
ISSN: 1359-0790

Keywords

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Article
Publication date: 3 December 2019

Negar Jalilian, Seyed Mahmoud Zanjirchi and Mark Goh

The purpose of the paper is to bring attention to documentary credits and the efforts to reduce debt obligations in credit history is recognized as an important source of

Abstract

Purpose

The purpose of the paper is to bring attention to documentary credits and the efforts to reduce debt obligations in credit history is recognized as an important source of uncommitted bank earnings. Credit risk has a significant impact on the stability of the banking system. This paper identifies the types of credit risk in the banking supply chain.

Design/methodology/approach

The authors model the types of credit risk using the intuitive fuzzy failure modes and effects analysis (IFMEA) and intuitive fuzzy cognitive mapping. The population of the study that is needed for the interviews and expert panels comprises senior managers and experts of a leading bank in Iran. The respondents are experienced in credit and banking risk and were selected through judgment sampling and snowballing.

Findings

The findings suggest that reducing the risks of the foreign letters of credit contracts can mitigate the risk in the agricultural sector, the specific risks of rent-to-own contracts, the risk of the long-term facilities and the specific risk of the domestic letter of credit contracts.

Originality/value

This research investigates Iran Tejart Bank’s credit risk, formulates a model of the types of credit risk present and analyzes them using the intuitive fuzzy failure modes and effects analysis and intuitive fuzzy cognitive map. Through this credit risk model, one can then facilitate risk management for better financial stability. Also, the model can be used to evaluate the risk indicators.

Details

Journal of Modelling in Management, vol. 15 no. 1
Type: Research Article
ISSN: 1746-5664

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Article
Publication date: 1 February 1995

Kern Alexander

Since the collapse of communism in the former Soviet Union and in Eastern Europe, the rise of organised crime has been swift and substantial. It has taken control of many…

Abstract

Since the collapse of communism in the former Soviet Union and in Eastern Europe, the rise of organised crime has been swift and substantial. It has taken control of many sectors of the economy in these countries and, because of its newly amassed wealth, it has attained significant political influence. Organised crime groups have used their political and economic influence to persuade certain provincial governments in the former Soviet Union to assist them in transferring their ill‐gotten proceeds to apparently legitimate investments in western countries. Some provincial governments, acting on behalf of certain organised crime groups, have exploited their ongoing relationships with leading international banks to obtain documentary credits to transfer billions of dollars of criminally derived money into investments in developed countries.

Details

Journal of Financial Crime, vol. 3 no. 1
Type: Research Article
ISSN: 1359-0790

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Article
Publication date: 30 September 2014

Yanan Zhang

– The purpose of this paper mainly is to examine the relevant rules concerning documentary letter of credit (L/C) fraud under criminal law in England and China.

Abstract

Purpose

The purpose of this paper mainly is to examine the relevant rules concerning documentary letter of credit (L/C) fraud under criminal law in England and China.

Design/methodology/approach

The paper analyses the regulations about such crime and relevant literature.

Findings

The similarities and differences of such rules have been identified briefly. L/C fraud is considered a conduct crime; and unspecific or vague provisions concerning this crime may cause difficulties of application in judicial practice in both England and China. But the possible punishment for L/C fraud criminals under Chinese criminal law seems more severe than that under English law. Dealing with L/C fraud in international trade under national criminal laws is not effective. Regional and international efforts on legal assistance in cross-border criminal cases still remain to be improved.

Research limitations/implications

The limitation is that it examines merely relevant substantial rules in legislation. This opens the paths to future research on the approach towards L/C fraud demonstrated in court cases in England and in China.

Social implications

The research underlies the need to take serious attitude and make more effective efforts towards cross-border criminal cases, although different countries may have different rules concerning specific economic crimes.

Originality/value

This paper fills the gap of a comparative study on how L/C is regulated under criminal law regime in England and China.

Details

Journal of Financial Crime, vol. 21 no. 4
Type: Research Article
ISSN: 1359-0790

Keywords

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