Documentary letter of credit fraud risk management
| Date | 05 October 2012 |
| DOI | https://doi.org/10.1108/13590791211266340 |
| Published date | 05 October 2012 |
| Pages | 343-354 |
| Author | Yanan Zhang |
| Subject Matter | Accounting & finance |
Documentary letter of credit
fraud risk management
Yanan Zhang
Department of Law, University of Eastern Finland, Joensuu, Finland
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.
Keywords Internationaltrade, International finance, Documentaryletter of credit, Fraud,
Risk management,Prevention, Buyer, Seller, Banks,Lawyers
Paper type Research paper
1. Introduction
Neil (1980) points out that risk basically means uncertainty. According to Gregory (2008)
enterprise risk management (ERM) can be defined as managing risks associated with
the business objectives of an organisation; risk refers to “the potential for loss caused by
an event (or series of events) that can adversely affect the achievement of a company’s
objectives”. Pickett (2006) argues that in practice many enterprises fail to put the fraud
inside in the ERM frame; thus, Spencer suggests that fraud should be put in the centre
stage, considering fraud as a risk. Besides taking fraud seriously, having a sound and
effective anti-fraud policy (four key elements: prevention, detection, deterrence and
response) in place is important (AICPA, 2009).
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
The paper derives partly from the author’s PhD dissertation “Approaches to resolving the
international documentary letters of credit fraud issue”, which was published by University of
Eastern Finland in January 2011 (Publications of the University of Eastern Finland,
Dissertations in Social Sciences and Business Studies No 15). The author is very thankful to
Professor Soili Nyste
´n-Haarala for comments.
Documentary
L/C fraud risk
management
343
Journal of Financial Crime
Vol. 19 No. 4, 2012
pp. 343-354
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791211266340
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