An introduction to the risks and prevention of letter of credit payments in international trade

The main risks of the buyer and seller under the letter of credit payment method

(A) the risks of the buyer in the process of payment by letter of credit

  1. Letter of credit fraud

Credit fraud is one of the common phenomena in the payment of international trade, generally occurs mainly in the buyer, resulting in the seller bears a huge loss. To reduce the phenomenon of international trade payment due to credit problems that lead to huge losses to the other party, it is necessary to further strengthen the management of letters of credit and strict enforcement based on the current situation, in order to maximize the loss of trust enterprises or individuals excluded from the international trade, to maintain a good environment for international trade. At the same time, if the bank does not ask about the authenticity of the documents on the surface, and pays based on the same data alone, then the wrongdoers can create false documents to obtain money from the bank. At the same time, because the cost of using letters of credit for fraud is relatively small, the risk is also small, but the gain is relatively large, so the use of letters of credit for fraud in the international are seen to grow, which is also one of the important factors leading to the deterioration of the international trade environment.

  1. Risk in the issuance stage

One of them is that the contract is cancelled due to the delay of the opening date. For the consideration of their own interests, exporters in the opening of the letter of credit will be made to delay the opening of the letter of credit or not open the letter of credit and other phenomena. Especially when the exchange rate changes a lot, the exporter to avoid the growth of the exchange rate and the decline in their own earnings and make the delay in the opening of the certificate or not to open the behavior, and then force the bank to cancel the contract. Because according to the law, the first day of the contracted shipment date is the best date to open the certificate, but the seller can only determine the month of shipment, most of them can not determine the specific day of shipment. If the buyer does not prepare the letter of credit on the first day of shipment, the bank will not be able to pay, and the seller naturally will not make the shipment; secondly, according to the law, the contract must be effective and the letter of credit issued by the buyer must be consistent with the contract, otherwise the contract will not be effective, that is, the interests of both parties cannot be protected. When there is no special provision in the contract, it is generally executed in accordance with the conventional practice, that is, in accordance with UPC500, which means that the buyer cannot set other additional conditions in the process of opening the letter of credit for settlement, which will not only be rejected by the seller but also may face claims from the other party.

(B) The main risks of seller under L/C payment method

  1. The importing party does not open the L/C according to the contract

In principle, the contract signed by both parties should be consistent with the terms of the letter of credit, but in the specific operation process there are various factors that lead to the importing party does not open the letter of credit in accordance with the rules, the contract can not be properly implemented, so that the exporting party suffered huge losses. On the one hand, due to the rapidly changing market information, all parties may face the pressure to achieve changes, especially the import side of the pressure is greater, for this reason, the import may not strictly follow the contract to open a letter of credit or not open a letter of credit, etc.; on the other hand, the import side to maximize their own interests and minimize the risk of international trade and request changes in the terms of the contract. In order to achieve this purpose, the importing party is likely to request the addition of annex clauses in the letter of credit to benefit its own interests, which will cause difficulties in implementation for the other party, and even end up suffering huge losses.

  1. The importing party deliberately sets up obstacles

Driven by the interests, the importing party will take advantage of the seriousness of the contract and the strictness of the L/C to add additional clauses in order to cause difficulties to the other party in contract performance. For example, adding ambiguous clauses, adding clauses that are contrary to the contractual agreement, adding misspellings on purpose, etc.

  1. Alteration of L/C for fraud

Since the letter of credit is the key element of contract execution and payment, it is easy to be used by the importing party to achieve their own purposes. The most common is the use of expired letters of credit for alteration, in order to cheat the other party’s goods, when the only way for the exporters to screen them is to rely on professionals or banks.

  1. The importer obtains the letter of credit through illegal means

The importer obtains the blank letter of credit from the bank by illegal means, or makes a fake letter of credit illegally by colluding with the bank staff, etc. and gives it to the exporter, if the exporter is negligent and does not find it, it will cause huge losses.

  1. Requirement of separate instruction for L/C to be effective

If the contract terms do not clearly specify the delivery date, shipment date, samples approved by inspection, etc., especially if the above date is to be notified before implementation, it is very likely that the final transaction will be aborted due to untimely notification or no notification, resulting in huge losses to the seller.

Preventive measures for transaction risks under letter of credit payment method

(A) Trade cooperation when carefully choose the object of the transaction

Whether it is international trade or domestic trade, the credibility of the two sides of the transaction is crucial, and the level of credibility directly affects the security of the transaction. For both parties, in order to protect their legitimate interests in the transaction process should not be easy to sign a contract and should be investigated in advance on the basic situation of the other party to understand whether the other party has a good reputation, especially whether there is a breach of contract. When it is determined that the other party has a good reputation, then the next step of contract signing and specific transactions.

(B) set different certificate requirements for the provisional payment terms of the letter of credit

In international trade, due to the difference of goods specifications or transaction types, banks have different requirements in the letter of credit? In this regard, both parties to the transaction should apply to the bank to put forward specific requirements for various types of certificates according to the specific conditions of the actual transaction and require both parties to strictly implement them based on the purpose of protecting the interests of both parties and minimizing transaction risks. At the same time, the buyer can also request the seller to provide the certificate issued by the professional quality inspection agency in the temporary delivery terms to protect their own interests.

(C) Strictly examine the various documents issued

For the buyer, the seller is often encountered in the documentary forgery and once the review is not, the loss caused is greater; conversely, for the seller, the buyer may also be in the documentary or documentary forgery, the loss suffered is also huge. For this reason, for both sides, in the transaction process to do the following two things: first, strictly follow the contract agreement to develop all kinds of documents; second, according to the contractual content and the actual transaction of all kinds of information in the documents to strictly check, in order to avoid the occurrence of document forgery phenomenon found. Finally, if the documents are found to be falsified, the transaction should be stopped in time, and the other party should be held responsible according to the legal provisions.

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