Documentary letter of credit fraud risk management
Yanan Zhang
Department of Law, University of Eastern Finland, Joensuu, Finland
Abstract
Purpo – The purpo of this paper is to explore and examine, in a systematic manner, possible 企业成长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 arched 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, llers, and banks in international L/C transactions can take in business to reduce L/C fraud. The option
of banks providing additional rvices 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 propod 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 llers maintain clo 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 enterpris likely to be involved in international documentary L/C transactions.
入党志愿书模板Originality/value – This paper fulfils the gap of a holistic study on how to prevent international documentary letter of credit fraud.
Keywords International trade, International finance, Documentary letter of credit, Fraud,Risk management, Prevention, Buyer, Seller, Banks, Lawyers
1. Introduction
Neil (1980) points out that risk basically means uncertainty. According to Gregory (2008) enterpri risk management (ERM) can be defined as managing risks associated with the business objectives of an organisation; risk refers to “the potential for loss caud by an event (or ries of events) that can adverly affect the achievement of a company’s objectives”. Pickett (2006) argues that in practice many enterpris 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 riously, having a sound and effective anti-fraud policy (four key elements: prevention, detection, deterrence and respon) in place is important (AICPA, 2009).
In combating fraud, fraud prevention and detection must operate hand in hand
(AICPA, 2009). To prevent fraud measures to reduce motivation, limit chances and
restrict the ability of offenders to commit fraud have to be taken (AICPA, 2009). Proactive
fraud prevention has to be conducted, and it covers good division of responsibilities, supervision of staff, monitoring work performance, and all tho measures intended to ensure dishonest people cannot access the system, or even if the systemis accesd that a proper control is in place (COSO, 2004). Further factors that help to prevent fraud can be anti-fraud policies, procedures, training and fraud awareness (Naill, 2006).Nevertheless, preventive measures may require some investment in advance and cannot provide complete protection.
However, even dedicated controls can be abud by fraudsters. Thus, a fraud
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detection strategy (designed to detect fraud), including noticing or analysing strange
trends or inconsistencies, looking out for red flags that indicate something may be going wrong and a reporting system need to be adopted (AICPA, 2009). In addition, managers also need to asss internal controls regularly, and know the latest fraud issues and what new scams exist (Pickett, 2006).
Fraud deterrence, deterring potential fraudsters from attempting fraudulent activity,is linked cloly with the respon of an enterpri to fraud (AICPA, 2009). It is significant if a consistent and comprehensive respon to suspected and detected events雷雨结局 of fraud is in place. A few respon methods have been proved to be effective, such修订 葡萄牙留学as conducting thorough investigations, allocating individual personnel liable through internal, civil or criminal action, prerving evidence for procution and reviewing existing systems to investigate system gaps (AICPA, 2009).
Therefore, in fraud risk management, esntially preventive measures against fraud are required so that the harmful conquences can be controlled or prevented before fraud actually happens; and a good respon plan is helpful so that people know what to do.
Letter of credit (also documentary credit, or more formally documentary letter of
credit, hereinafter L/C) is a well-known payment method in international trade. This
instrument has two fundamental principles: the autonomy or independence principle
and the doctrine of strict compliance. Such principles intending to facilitate international transactions make L/C easy to be abud by fraudsters. Traders from developing countries who are lack of sufficient experience and knowledge in L/C transactions are often the targets of L/C fraud (Xiaorong and Ruiping, 2005). The Executive Director of the ICC Commercial Crime Services, Pottengal (2009) emphasid that L/C fraud in international transactions has become increasingly complex and new schemes have developed. Each year traders or banks lo huge amounts of money due to international L/C fraud. In the LONECO ca, it was discovered that US$400 million were lost due to a L/C fraud scheme involving forged documents; 26 international banks in the Middle East and Europe (some even had sophisticated trade finance operations) were victims (Pottengal, 2008).
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