Documentary credit fraud against banks: analysis of Korean cases
| Date | 05 October 2015 |
| Pages | 457-474 |
| Published date | 05 October 2015 |
| DOI | https://doi.org/10.1108/JMLC-12-2014-0048 |
| Author | Chang-Ryung Han,Hans Nelen,Matthew Youngho Joo |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Documentary credit fraud
against banks: analysis of
Korean cases
Chang-Ryung Han
School of Law, Maastricht University, Maastricht, The Netherlands and
Research Unit, World Customs Organization, Brussels, Belgium
Hans Nelen
School of Law, Maastricht University, Maastricht, The Netherlands, and
Matthew Youngho Joo
Financial Investigation Division, Korea Customs Service, Daejeon, Korea
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 unqualied 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
ight 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 ndings or to apply the ndings 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 renement of the application of
opportunity perspective to white-collar crime.
Keywords Customs, Fraud, Documentary letter of credit, Routine activity theory,
Crime pattern theory
Paper type Research paper
1. Background
International trade fraud is not a new phenomenon. It has been in existence for hundreds
of years and is persistently growing. There are many forms of fraudulent international
trade transactions. The International Chamber of Commerce (ICC) has identied ve
The current issue and full text archive of this journal is available on Emerald Insight at:
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Documentary
credit fraud
against banks
457
Journalof Money Laundering
Control
Vol.18 No. 4, 2015
pp.457-474
©Emerald Group Publishing Limited
1368-5201
DOI 10.1108/JMLC-12-2014-0048
types of fraud: documentary credit fraud; scuttling[1], deviation and cargo theft; arson;
charter party fraud; and cargo insurance fraud (Youssef, 1998). Objective, empirical
statistics that could adequately measure the most prevalent form of fraud in
international trade are yet to be produced. What is certain, however, is that documentary
credit fraud has drawn more attention from scholars and professionals than other types
of fraud (Rider, 2002) because it cunningly exploits the loopholes of the complicated
mechanism of letters of credit (L/C) and continues to progress steadily despite efforts to
prevent it.
Documentary credit fraud refers to an illicit activity in which either exporters or
importers violate their obligations, such as shipping goods or making payment, to
obtain nancial benet by exploiting the loopholes of the L/C mechanism, thereby
resulting in nancial loss to either importers or exporters (Blodgett and Mayer, 1998;
Zhang, 2012). As it is characterized as a conict between the two civil parties, or the
exporter and the importer, documentary credit fraud has mainly been addressed from
the perspective of commerce laws to clarify where the fault and responsibility lie
(Blodgett and Mayer, 1998;Leacock, 1984;Mann, 2000). As documentary credit fraud
has traditionally been viewed and treated as a civil matter, traders and law enforcement
authorities, in particular customs administrations, have regarded documentary credit
fraud as lying beyond the scope of customs’ enforcement powers, which usually deal
with threats to tax revenues and public security in international trade (Han and Ireland,
2014).
While investigating overvaluation cases that were suspected of ight of capital
overseas and money laundering, the Korea Customs Service (KCS) recently discovered
an unfamiliar, unique type of documentary credit fraud that victimized only L/C-issuing
banks, harming neither the exporter nor the importer. The discovery of this obscure
documentary credit fraud against banks naturally begets certain questions regarding
its features, operational mechanism and responses to it:
• what is documentary credit fraud against banks;
• how such documentary credit fraud is perpetrated without harming the importer
or exporter;
• given that neither importer nor exporter is victimized, what relationship between
the importer and the exporter is required for this kind of documentary credit fraud
commission;
• why trade payment via L/C is susceptible to fraud; and
• what measures can be implemented to tackle this type of fraud.
To answer these questions, this study analyzes documentary credit fraud cases detected
by the KCS, drawing on opportunity perspective, which focuses on opportunities where
perpetrators, criminals and victims, interact rather than simply on the criminality of
offenders to explain the crimes perpetrated (Cook, 1986).
2. Letters of credit
2.1 Letters of credit as a payment method
As documentary credit fraud against banks is based on L/C, it is necessary to describe
the L/C mechanism before getting into an analysis of this type of fraud. Upon entering
into a contract of an international trade transaction, the exporter and the importer
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