Fraud in letter of credit transactions: The experience of Malaysian bankers

• Published in: International journal of law, crime and justice Vol. 42; no. 3; pp. 224 - 236
• Main Authors: CheHashim, Rosmawani, Mahdzan, Nurul Shahnaz
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 01-09-2014; Elsevier
• Subjects: Banking; Banks; Credit; Criminal sociology. Police. Delinquency. Deviance. Suicide; Documentary research; Documentation; Fraud; Letter of credit; Malaysia; Malaysian banks; Merchants; Payments; Sociology; Sociology of law and criminology; Transaction costs; West Malaysia; Malaysian banks; Letter of credit; Fraud; Bank; Qualitative study; White Colar Crime
• ISSN: 1756-0616; 1876-763X
• DOI: 10.1016/j.ijlcj.2014.01.008

This paper explores the issue of fraud in letter of credit (LC) transactions in Malaysia. We explore the common modus operandi used by fraudsters in LC transactions and highlight the various actions taken by banks when dealing with forged LC documents and fraudulent goods. We find that although the phenomenon of fraud in LC arrangements in Malaysia is marginal, banks have indeed experienced fraud in LC dealings. Banks actions are firmly guided by the Uniform Customs and Practice (UCP) for Documentary Credits, which clearly affirms that banks must honour payment to the seller upon full compliance of the LC requirements. Findings reveal that banks adhere to the UCP guidelines despite being presented with falsified documents that cannot be fully proven or even when there is a possibility that substandard goods are being transacted. Finally, recommendations on how banks can mitigate these problems are offered.