A Letter of Credit (LC) is a reliable payment option for international trade; however, it is susceptible to fraudulent activities. It arises most common LC frauds. Importers and exporters alike need to be vigilant about possible scams and implement measures to safeguard their transactions.
The 06 Common LC Frauds Schemes
1. Modification of the Shipping Documents
🚩 Scam: The seller sometimes submits fraudulent or duplicate wrong Bills of Lading, Commercial Invoices, or Packing Lists to receive payment without actually dispatching the goods. It focuses on common LC Frauds.
✅ Prevention Measures:
- Always check & revise the documents with the relevant authority such as the shipping company or the port authority.
- Choose banks that have rigorous document verification procedures.
- Request original documents rather than photocopies.
2. Phantom Shipments (Goods Not Sent)
🚩 Fraud: The exporter provides shipping documentation, but the merchandise was never dispatched or is of minimal value compared to what was agreed upon.
✅ How to Prevent:
- Engage an investigation agency such as the SGS or Bureau Veritas to confirm the shipment before processing the payment.
- To request for a tracking number & verify directly with the bearer.
- Always improve a letter of credit (LC) that includes a requirement for a third-party research or investigation certificate.
3. Collusion & Connection Between Seller & Shipping Company
🚩 Fraud: A fraudulent shipping company creates a fake Bill of Lading expressing that goods were transmitted when they were actually not.
✅ How to Prevent:
- Always ensure the shipping information directly with the carrier.
- Select a renowned and well-known freight forwarder.
- Request a tracking report from a self-reliant logistics provider.
4. Over-invoicing & Under-invoicing
🚩 Fraud: Exporters may overdraw invoice amounts to facilitate illegal fund transfers like money laundering or reduce invoice values to avoid the taxes.
✅ How to Prevent:
- Re-check & match the invoice amounts with prevailing market prices.
- Affirm the Commercial Invoice against the Proforma Invoice.
- Ensure that the bank maintains Anti-Money Laundering (AML) standards.
5. Fake & Fraudulent of LC Issuing Banks
🚩 Fraud: The buyer or the purchaser submits a letter of credit (LC) from an absent or unauthorized bank to prevent the supplier from receiving payment.
✅ How to Prevent:
- Confirm the bank’s legitimacy through SWIFT or the central banking authority.
- Request an LC from reputable global banks.
- Ask for a confirmed LC, in which a secondary (trusted) bank is responsible for guaranteeing payment.
6. LC Discrepancy Scam
🚩 Fraud: The purchaser identifies small inconsistencies in shipping paperwork and declines to make payment, causing delays in the transaction or compelling the seller to accept unfavorable conditions.
✅ How to Avoid:
- Carefully prepare documents to classify exactly with LC requirements.
- Collaborate with a proficient freight forwarder to guarantee fidelity.
- Properly utilize a confirmed LC to moderate the risk of the buyer exploitation.
How to Assure Yourself Against LC Frauds
✅ Conduct Due Diligence – Confirm the legitimation of your trading partner, bank, and shipping firm.
✅ Choose a Renowned Banks – Option of choosing well-known & the globally recognized financial institutions.
✅ Utilize the Third-Party Inspection – Always ensure that the goods are confirmed before payment is made.
✅ Establishment of Secure Contracts – Organize appropriate conditions in contracts regarding documentation and penalties for fraudulent activities.
✅ Look for Legal Protection – Engage with a legal professional for international trade agreements.
Conclusion
Although Letters of Credit (LCs) offer security, they are not entirely free from responsibility to fraud. Both buyers and sellers need to stay observant to perform comprehensive verifications, and collaborate with trustworthy financial entities to relieve fraud risks.
