Letter of credit fraud

Letter of credit fraud (신용장 사기/信用狀詐欺) refers to various types of fraud involving letters of credit.

A letter of credit (L/C) is a main legal instrument of international settlement which is widely used in international trade. As the volume of international trade increases, the fraudulent transactions of L/C, being a representative white-collar crime, have severely spoiled the trust basis of international trade.

There are many kinds of L/C fraud. In terms of the form of fraud, there are fake documents or fogery, "soft clause" L/C, etc. Subject to the actor of fraud, there are fraud made by the applicant and the beneficiary, adn even the bank that insists on unreasonable conditions.

Key words
letter of credit, fraudulent transaction, negotiation, deferred payment

Korean Case law
There are a number of cases regarding fraudulent transactions involving letters of credit. Here are leading cases on L/C fraud.

IBK v. BNP Paribas

 * Supreme Court Decision 2001Da68266 delivered on January 24, 2003
 * (Reimbursement of the L/C payment)

a. Defenses against Negotiating bank
Even if an L/C transaction was turned out fraudulent due to forged shipping documents after an L/C had been negotiated in compliance with the applicable law, a negotiating bank may nonetheless demand reimbursement of the L/C amount unless it is recognized that a negotiating bank was involved in a fraud such as forgery as a party actually committing such an act, or at the time of negotiation, knew or had sufficient reasons to suspect that a fraud had been committed such as forgery of documents, etc.

However, in case an L/C is negotiated not in compliance with the applicable law, the negotiation cannot be deemed to be a ˝negotiation˝ as provided in the UCP even if a negotiation is completed in exchange for value, and an issuing bank may avail itself of all defenses, which the beneficiary may be subject to, against a negotiating bank that presented an L/C at maturity, and upon the revelation of beneficiary's fraudulent acts, an issuing bank may refuse payment on such ground.

b. UCP and Settlement via SWIFT
The Uniform Customs and Practice for Documentary Credits (UCP) established by the International Chamber of Commerce (ICC), is supposed to apply to an L/C issued by means of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and likewise, the UCP which has been in effect as of the date of the issuance of pertinent L/C is applicable to an L/C unless exceptional circumstances are demonstrated as having existed, even if a provision expressing that the ICC's UCP shall apply to an L/C does not appear on the face of such L/C.

c. Negotiation
As Article 10.b.ii of the UCP provides that "Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorized to negotiate. Mere examination of the documents without giving of value does not constitute a negotiation."

Thus, in light of the purport of this provision, a "negotiation" can be recognized only where a bank authorized by an issuing bank gives value for documents, and in case of an unauthorized bank, a "negotiation" cannot be recognized as effected even if the giving of value takes place, and such view equally applies to a deferred payment L/C.

d. Deferred payment L/C
In light of the purport of provisions of the afore-mentioned UCP Articles 10.a, c, d and 10.b.i, 14.a Article 10 (Types of Credit) of the UCP
 * a. All Credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.
 * b. i. Unless the Credit stipulates that it is available only with the Issuing Bank, all Credits must nominate the bank(the ˝Nominated Bank˝) which is authorized to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate. In a freely negotiable Credit, any bank is a Nominated Bank. Presentation of documents must be made to the Issuing Bank or the Confirming Bank, if any, or any other Nominated Bank.
 * ii. Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorized to negotiate. Mere examination of the documents without giving of value does not constitute a negotiation.
 * c. Unless the Nominated Bank is the Confirming Bank, nomination by the Issuing Bank does not constitute any undertaking by the Nominated Bank to pay, to incur a deferred payment undertaking, to accept Draft (s), or to negotiate. Except where expressly agreed to by the Nominated Bank and so communicated tothe Beneficiary, the Nominated Bank's receipt of and/or examination and/or forwarding of the documents does not make that bank liable to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate.
 * d. By nominating another bank, or by allowing for negotiation by any bank, or by authorizing or requesting another bank to add its confirmation, the Issuing Bank authorizes such bank to pay, accept Draft(s) or negotiate as the case may be, against documents which appear on their face to be in compliance with the terms and conditions of the Credit and undertakes to reimburse such bank in accordance with the provisions of these Articles.

Article 14 (Discrepant Documents and Notice)
 * a. When the Issuing Bank authorizes another bank to pay, incur a deferred payment undertaking, accept Draft(s), or negotiate against documents which appear on their face to be in compliance with the terms and conditions of the Credit, the Issuing Bank and the Confirming Bank, if any, are bound:
 * i. to reimburse the Nominated Bank which has paid, incurred a deferred payment undertaking, accepted Draft(s), or negotiated,
 * ii. to take up the documents.
 * b~f. Omitted as to an issuing bank's authorization and reimbursement obligation against a nominated bank (hereinafter equally applicable to a confirming bank as well) and the non-existence of Articles banning a negotiation of shipping documents and the payment of a deferred payment L/C before the expiration date by a nominated bank under the UCP and the fundamental purport of using an L/C as an independent and abstract mode of payment in international transactions in order to eliminate insecurities associated with the payment to the beneficiary, and under the consideration that from the fairness point of view the risks arising from an L/C's characteristics of being independent and abstract should be borne by the applicant of an L/C, even in case of a deferred payment L/C provided with the maturity date of payment, so as far as an issuing bank nominated another bank which incurs a deferred payment undertaking by negotiation, we hold the view that an issuing bank by such authorization towards another bank purports to undertake reimbursement of the payment at maturity even if a nominated bank negotiated shipping documents before the maturity date unless otherwise stipulated (on the condition that an issuing bank may refuse the reimbursement up until the maturity date).

Because it is not infeasible to negotiate an L/C with shipping documents, etc. even in case where a draft is not issued in connection with an L/C, a deferred payment L/C may be negotiated by a nominated bank as far as a nominated bank exists.

The L/C of this case did not specifically designate the nominated bank which incurs a payment undertaking or negotiates shipping documents, and explicit authorization for free negotiation did not appear on its face, and in the contrary, we found explicit expressions on its face such as that the payment of L/C amount is available only by the issuing bank (Field 41D : available with … at our counters) and shipping documents shall be presented in Paris, and Paris where the issuing bank is located shall be a point of reference in determining the validity period of the L/C, so we concluded that the issuing bank did not nominate or authorize another bank which may incur a payment undertaking under the L/C of this case or negotiate shipping documents.

Reference cases

 * Supreme Court Decision 96Da37879 delivered on August 29, 1997


 * Supreme Court Decision 96Da43713 delivered on August 29, 1997


 * Supreme Court Decision 2000Da60296 delivered on October 11, 2002


 * Supreme Court Decision 2008Da88337 delivered on January 13, 2011

KEB v. Bank of China

 * Supreme Court Decision 2009Da93817 decided January 27, 2012
 * (Amount of the Letter of Credit)

See the Supreme Court decision posted at Letter of credit.