Documentary credit fraud against banks: analysis of Korean cases
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 unqualified L/C applicants, wer...
A primer on new techniques used by the sophisticated financial fraudster, with special reference to commodity market instruments
Financial instruments such as documentary credit, structured finance and derivatives have proved their value in commodity trade. However, the sophistication of these instruments can also make them a tool for financial fraud. This report discusses how, using commodity market instruments such as letters of credit, warehouse receipts, Special Purpose Vehicles, futures and swaps, the sophisticated financial fraudster may try to trick bankers, commercial counterparties, Government regulatory or tax offices, and shareholders. Various techniques that have been used in the past are described, and illustrated with case studies (e.g. the salad oil swindle, Solo Industries and Enron). Ways in which Governments, banks and commodity firms can reduce the potential for such frauds are summarized in the report’s conclusion.
On the Fraud from the L/C Beneficiary
Letter of credit(L/C) is a method for settling accounts,which is widely used in international trade when both parties don't trust each other.The L/C mechanism includes two main principals: the L/C independency principle and the L/C match principle.These two principles make the L/C mechanism run at lowest cost,but they bring convenience to L/C beneficiary for fraud.The beneficiary's fraud mainly is to obtain the sum of money by providing the forged bill of documents that conform to the L/C requirement in superficiality.So,some countries develop the P/C fraud exception principle.In international trade,the buyer should take measures to prevent the P/C from fraud.The courts in dominant nations should establish the ban or frozen measures according to the P/C fraud exception principle.