Major Risks in L/C Use

Although L/C is usually easier to be accepted by both of the business parties, it is often
exploited by dishonest business man due to its uniqueness (especially its rigid conformity
rule). There are also a series of risks with it. From the perspective of export business, there
are the following risks concerning the exporter.
1. The importer might not issue the letter according to the contract.
Clauses in the contract should be consistent. Yet due to multiple causes, the importer usually
does not issue the letter according to the contract, causing difficulties in carrying out the
contract or losses to the exporter. Most commonly, the importer does not issue the letter in
due course or even never issues it (e.g. when there are changes in the market or stringent
regulations on foreign exchange and importation).The importer may also add in the letter
some clauses that are beneficial to them (e.g. unilaterally enlarging the insurance coverage
and amount, changing the destination port or the package) so as to modify the contract. They
may also put in the L/C some restrictive regulations.
2. The importer purposely sets up some barrier.
The importer often takes advantage of the conformity rule in the L/C by adding in it some
impossible requirements or putting up some traps, such as those L/Cs with uncertain
conditions, typographical mistakes or contradicting clauses.
Typographical mistakes in L/C may concern the name of the beneficiary, the address, the
vessel, validity date, etc. Such minor mistakes directly impact upon the documents to be
submitted, which might become the excuse of the opening banks refusal to payment.
Besides, in some L/Cs, partial shipment is forbidden while there are deadlines for each
shipment; bill of lading is allowed to be presented while transshipment is forbidden; there are
overlapping kinds of insurance required. All of the above are self-contradictory.
3. The import might counterfeit the L/C, steal blank L/C printed by other banks, or conspire
with clerks from a bankrupted or to be bankrupted bank to issue and send a L/C to the
exporter, causing whom a loss in goods and funds if the fraud is not discovered.
Here is a case: A foreign trade company in Henan once received a documentary L/C issued by
Standard Chartered Bank Ltd. Birmingham branch, England, with an amount of USD$3720000,
the notifying bank being National Westminster Bank Ltd. London. Since the letter was not
notified by the beneficiarys local bank as it should be, its authenticity cannot be guaranteed.
The company took the letter to the Bank of China to identify before shipping. Something
suspicious were discovered by the professionals in the bank:
1) The layout of the letter was old-fashioned and there was no consignors address. The postal
stamp was fuzzy and the location cannot be recognized.
2) The letter appointed a notifying bank, National Westminster Bank Ltd. London, which was
unusual.
3) The address of the acquiring bank cannot be found on the Bank Year Book.
4) The signature of the letter of credit is printed, rather than hand signed, not matching.

Also the letter of credit requires of air cargo to Nigeria, a country where multiple frauds
happened. In light of the above, the bank determined that the letter was forged. After
verified with the issuing banks head office, the case was clear. Thus a counterfeited L/C
fraud was avoided.
4. The import requires documents that are difficult to obtain.
Documents signed by a certain person, bill of lading marking the cargo place of the ship or
containers within the ship, or imparting a negotiation application with the insurance
companys receipt, all of the above are impossible to the seller as a beneficiary or
uncontrollable by the seller.
For example, there are clauses in L/C requiring the beneficiary to present the quality,
quantity and price inspection certificate issued byt the inspection bureau. But according to
China Commodity Inspection Bureau, they can only offer quality and quantity inspection
certificate, no price inspection certificate, thus unable to be obtained by the seller. The
seller should immediately ask the buyer to modify the letter through the bank and cancel
words concerning price inspection. Another example is that porcelain and bulk ore exported
outside China are to be shipped in single hatch, the latter also not allowed to be shipped in
deep tank, as stated in some L/C. Thus a note of not allowed to be shipped in deep tank
should be included in the bill. In reality, the consignees requirement should be taken into
consideration but it should not be listed in the L/C because allocation of the ship is a right
reserved to ship owners and as long as they properly and discreetly transport the goods, the
goods owner should not interfere. Also, they have to consider the whole ship when allocating
the goods, thus it is not for the goods owner to designate the loading place.
5. Clauses in the L/C may be at odds with national or related authorities regulations.
In practice, the seller should be careful that although some clauses in the L/C is beneficial to
himself, some regulations in some countries, regions or from some issuing departments may
prevent these clauses from going into effect. Precautions should be taken. Sometimes the
seller has to reason with the parties concerned to eliminate such clauses.
For example, usance L/C from other countries states that the interests and final discount fees
should be afforded by the buyer. But when it is time to pay, the issuing bank may deduct the
interests income tax, as required by laws in certain countries or regions. Here is a case, Paris
National Bank, with an eye to the French tax law, deducted 30% interests income from the
interests paid to the beneficiary. Yet the law is targeted towards French corporate and
citizens, and the usance draft is financed by the export company from this country, which
means the buyer should afford the interests and should not cut the interests income tax. Also,
such tax laws exist in Italy and Cyprus. The exporters should consider this and tell the
overseas buyer to modify such clauses concerning interests income tax in the L/C. Another
case: L/Cs from overseas may require insurance from London Association and China Peoples
Insurance Company, to be more specific, to be insured against all risks with the London
Association and against war risks with CPIC. Although insurance in two different areas is
possible, the CPIC requires its clients to choose only one insurance company. So the Chinese
exporter here should contact its client to delete one of the institution and then apply for one.
6. Alter the L/C to cheat

The importer might alter invalid L/C, change its sum, shipping date and beneficiary and send
or give it to the beneficiary for export goods or bank financing with a L/C from the exporter.
For example, a foreign trade company once received a L/C with a sum of 3.18 million US
dollars from a Hong Kong client. After examination the local Bank of China found apparent
altering marks with the sum, shipping date and beneficiary name. The beneficiary was
notified and consulted the opening bank only to find out the L/C was altered and given to the
company so as to get a 6.30 million US dollars L.C from the bank in China. The L/C was
actually an outdated one. Thanks to the carefulness of the bank, this fraud of huge amount
was prevented.
7. Fraud with counterfeited confirmed L/C
Fraud with counterfeited L/C is when an importer wins the trust of the exporter with a fake
L/C to counterfeit a confirmed letter from a big international bank so as to get the export
goods. For example, a local Bank of China once received an electronic L/C from a western
bank in Jakarta, Indonesia asking New York Suisse Joint Bank to confirm it, the sum being 6
million US dollars, the beneficiary being a foreign trade company in Guangdong and the goods
being 2 million snake skins. But there was no opening banks information in the Bank Book of
Year. Later a confirmed letter from Suisse Joint Bank in Zurich was received, with two
signatures, one of which unrecognizable. Then the beneficiary has got the goods ready for
shipment. To make things sure, Bank of China persuaded the beneficiary not to ship the goods
first, and on the other hand got into contact with the Suisse Joint Bank in New York and
Zurich only to get a negative answer. Now it was sure that it is a counterfeited confirmed L/C
to swindle the goods.
8. L/Cs invalid until further notice
If a L/C does not state clearly the shipment date, the import permit and goods sample
inspection, the seller might suffer a loss due to the price change of the goods when waiting
for the notice after the goods are ready.
9. Contents in the L/C not concerning the deal.
If a L/C states that payment is possible after the goods have arrived, the goods are qualified
after inspection, goods are verified by the foreign exchange authorities, or when the importer
have honored the draft (like when the buyer does not honor the draft, the opening bank has
no responsibility), it is not a L/C deal and the exporter has no security.