How to Improve the Regulation and Supervision of Fraud on Letter of Credit
|School||China University of Political Science|
|Keywords||letter of credit fraud regulation|
Letter of credit, as a means of international settlement and payment, once became the most popular means for payment in international trade because it has bank credit as guarantee and it is a convenient financing method. However, in recent years, as people are gradually aware of the shortcomings of letter of credit, in particular, the frequent occurrence of fraud on letter of credit, letter of credit is less used year by year.This thesis discusses, from both theoretical and practical perspectives, the advantages and disadvantages of letter of credit, with a strong focus on frequent occurrence of fraud on letter of credit. In many of the cases, fraud was used against banks by applying for letter of credit without underlying trading activities, forgery, falsification or using expired letter of credit. This thesis focuses on fraud against banks, discusses the reasons of fraud and provides suggestions on how the banks can avoid fraud. Fraud on letter of credit has not only reduced the creditworthiness of letter of credit thereby reducing its popularity year by year, but also threatened the stability and security of banks and even the financial system of a country.However, there are many issues relating to China’s regulatory framework, legal system and supervisory mechanism on fraud regarding letter of credit and China is facing a difficult situation in regulating fraud on letter of credit. With regard to supervisory mechanism, these issues include unclear delineation of supervisory authority, outdated manner and concept and low quality of the supervisory team. With respect to the legal system, there are two levels of issues. At legislative level, the issues are conflicting rules, lack of rules or impractical rules. At the level of legal interpretation regarding judicial remedy for fraud on letter of credit, the shortcomings of the two interpretations by the Supreme Court are (i) terms are defined vaguely therein; (ii) third party interest is not adequately protected; (iii) there is too much discretion in issuing injunction; and (iv) the provisions are difficult to execute. Concerning supervisory mechanism, the issues are regarding market access, comprehensive credit line, review of clients’credentials, letter of credit guarantee, foreign credit administration, international revenue and expenditure reporting, foreign exchange account supervision, review of underlying trading activities. In addition, there is no regulatory regime with respect to abusing letter of credit financing.This thesis discusses the above issues, provides suggestions on how to improve the supervisory regime, legal system and supervisory mechanism regarding fraud on letter of credit, and suggests the outlook of the future regulation and supervision of fraud on letter of credit.