Corporate letters of credit and their usage as an instrument for fraud
| Date | 04 May 2012 |
| DOI | https://doi.org/10.1108/13590791211220476 |
| Published date | 04 May 2012 |
| Pages | 213-225 |
| Author | Ali Polat |
| Subject Matter | Accounting & finance |
Corporate letters of credit
and their usage as an instrument
for fraud
Ali Polat
College of Business Administration, King Saud University,
Riyadh, Saudi Arabia
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
documentsof relatedinstitutions togetherwith some examplesof works done by the authorsfrom 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 coversa topic which is almostuntouched.As the number of documentary
creditsthat are issuedby corporates are rareand this is not alsowell documented inthe theory was shown
by this research. The absence of the information in theory and practice gives room to the fraudster.
Keywords Letter of credit, Documentary credit, Corporatefinances, Fraud
Paper type Research paper
1. Introduction
It is almost a consensus that documentary credits are one of the most frequently used
instruments of payment in international trade. As Verkuil (1973) mentions, this
instrument has existed for more than 100 years[1]. Documentary credits provide the
exporter with an independent bank undertaking of payment. The buyer is certain that
the payment will not be made unless the seller presents documentary evidence
concerning the merchandise.
A basic concept in documentary credit practices is the idea that the banks’ pa yment
undertakings depend only on the timely presentation of the stipulated documents.
The parties in a letter of credit are the issuing bank and the beneficiary. The
applicant, the main instructor, and the main first party are not a part in terms of the
credit. Therefore, the credit payment obligation is undertaken by the issuing bank alone.
The Uniform Customs and Practice (UCP, 2007) for Documentary Credits drawn up
by the International Chamber of Commerce (ICC), and most recently updated in 2007
(ICC Publication No: 600), is an agreed international code in letters of credit deals.
Meanwhile, the letter of credit, itself, is a creature of national laws, even though courts
often refer to the UCP for guidance on interpretation and banking practice. Each national
law defines the letter of credit in its own way. As Rowe (1997) indicates, historical
trading and banking practices made up the letter of credit instruments available and this
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
Corporate letters
of credit
213
Journal of Financial Crime
Vol. 19 No. 2, 2012
pp. 213-225
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791211220476
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