Yanan Zhang (University of Eastern Finland) has published “Approaches to Resolving the International Documentary Letters of Credit Fraud Issue“, (Ph.D. Dissertation: Publications of the University of Eastern Finland, Social Sciences and Business Studies No. 15). Here is the abstract:
“The documentary letter of credit (L/C) is an important payment method and financial instrument in international trade. Two fundamental principles are independence and strict compliance. Its operation was standardised in UCP 600, which is used widely all over the world. However, the usage of L/C has been challenged by fraud. The approaches combine legal and business perspective.
The legal approach includes both criminal law approach and civil law approach. Fraud, as a crime, can be tackled under criminal law regime. The criminal legal remedy can be ineffective due to procedural problems between different jurisdictions. Fraud exception, as a judicial remedy to fraud in litigation, are examined under civil law regime.
The procedural instruments dealing with fraud exception are injunctions or stop-payment orders. We examine fraud exception rules in the UNCITRAL Convention at international level, and mainly in England and China at national level. With a comparative approach, we have found that the approach in China to fraud exception rules is to study different models in other countries and international rules, learn ideas from them, and then adapt them to its own context.
We claim that it is a phenomenon of legal transplant (a more proper term: legal adaptation), which is a common method of reforming law in China. Then we explore arbitration and other alternative methods for litigating international L/C fraud disputes. The research findings have shown that arbitration is possible, though several difficulties can occur in practice; the DOCDEX rules are not suitable for resolving L/C fraud disputes; negotiation or mediation is likely to be more effective when combined with some legal measures than being employed alone.
The final approach is a preventive and proactive approach, which is from business perspective. We have worked out several preventive measures for buyers, sellers, banks, and lawyers. Moreover, we have found that electronic L/C cannot totally protect L/C from the abuse of fraud.”