A letter of credit is the main credit payment instrument in international commerce. Whether in developed countries or developing countries, the method of letters of credit plays a significant role in international trade settlements, so much so that it has been referred to by British judges as the "lifeline of international trade." In our country, more than 50% of import and export trade settlements use the letter of credit method. However, the inherent complexity of letter of credit transactions and their independence from underlying contracts make risk prevention and financial regulation more challenging. Credit fraud cases occur worldwide, with developing countries becoming hotspots for such fraudulent activities. The amounts involved in these letter of credit fraud cases are enormous, causing severe harm and leaving profound lessons. Therefore, it is necessary to conduct an in-depth discussion on the causes, dangers, and characteristics of letter of credit fraud.
### I. Causes of Letter of Credit Fraud
One of the primary reasons for letter of credit fraud lies in the theoretical flaws inherent in letters of credit themselves, specifically the principle of "independent abstraction." A letter of credit deals with documents rather than goods. This fundamental principle is reflected in Article 4 of UCP500 (the Uniform Customs and Practice for Documentary Credits, 1993 revision), which states: "In letter of credit operations, the parties deal with documents, not with goods, services, or other acts related to the documents." However, documents are easy to forge, especially those consistent with the requirements of the letter of credit, making it easier to succeed in fraud. A bill of lading is a document of title, often described as a key to unlocking floating gold reserves. Forging a bill of lading is far easier than forging a masterpiece painting. Under the letter of credit system, sellers can deceive buyers using fake documents, particularly bills of lading, claiming that goods have been shipped when they have not. Banks mechanically verify that all documents required by the letter of credit appear to comply with its terms (as per UCP500 Article 3) before releasing payment, without any obligation to check the actual authenticity of the documents provided by the beneficiary (seller). This poses a significant risk to the buyer.
According to UCP500, banks have no responsibility for the accuracy of documents as long as they appear to comply with the letter of credit. Article 15 of UCP500 explicitly states: "Banks shall not be responsible for the form, sufficiency, correctness, genuineness, forgery, or legal effect of any document; nor for the description, quantity, weight, quality, condition, packaging, delivery, price, or existence of the goods represented by any document; nor for the integrity, actions, or omissions, solvency, performance, or standing of the shipper, carrier, insurer, or any other person." This exemption clearly emphasizes that banks bear no responsibility for verifying the authenticity of forged documents unless obvious discrepancies are visible on the face of the documents, which is unlikely in practice.
Therefore, B.S. Whibley, Chairman of the International Chamber of Commerce's Banking Commission on Techniques and Practices, pointed out: "We should pay attention to the important issue of fraud that exists today, clearly recognizing its causes, primarily because one party in a trade contract is dealing with a rogue. However, a documentary credit is merely a means of facilitating payment for trade transactions; it cannot act as a policeman to prevent fraud." Thus, the key to preventing fraud lies in the buyer knowing "who to trust and to what extent, and under what circumstances to deal with whom."
### II. Harms of Letter of Credit Fraud
The letter of credit system itself cannot prevent fraud. On the contrary, its rules and procedures, independent of the real economy, provide opportunities for criminals to exploit. While the letter of credit business plays a major role in promoting international trade, it also exhibits certain negative effects. Since World War II, international financial turmoil has led to frequent occurrences of letter of credit fraud, with astonishing amounts involved, resulting in increasingly severe losses. As a developing country undergoing reform and opening up, China has become a primary target for fraudsters. For example, in 1984, relevant Chinese authorities signed a steel import contract with foreign merchants and rented the "Europe Express" vessel from an Italian shipping company to transport the goods.
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