Disadvantages Of Letter Of Credit

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When two parties trade with each other, a letter of credit will be issued by a third party. Its purpose is to guarantee the payments for goods or services when the seller provides acceptable documentation. Typically, letter of credit is issued by the banks or other financial institutions. However, under certain circumstances, some reputable financial services companies might issue the letter of credit too. A letter of credit generally has three participants, which are the buyer of the goods or services (the applicant), the seller who provide the goods or services (the beneficiary) and the issuing bank (the institution issuing the letter of credit). [1] This kind of credit document is beneficial for the party paying for the commodity since payments…show more content…
[textbook] In letter of credit, if the businesses want the bank deal with these conditions, then all of the conditions in the transaction must state in the document. Besides, the bank only deal with documents instead of goods, services or performance to which the documents may relate. This characteristic of the letter of credit simultaneously is also the causes of the fraud risk. For example, a beneficiary of a letter of credit can prepare forged documents for their own interests, to present it to the issuing bank. Since the documents information is accord to the beneficiary, the issuing bank may recognize and accept it. The applicant must pay to the issuing bank for the goods it will never be receiving. If an applicant occurs in counterfeit letter of credit, the beneficiaries also have the duty to bear the fraud risks.…show more content…
In this situation, the exporter can also alter credit of their goods. Importers can change the amount, beneficiary's name or the date of shipment of the overdue credit. The importer may induce the exporter on issuing the credit with the purpose of financing the money by a credit from the bank. A similar incident occurred in a trading company in China's Jiangsu Province. The Jiang Su trading company received a letter of credit which was delivered by a Hong Kong client through the bank. The amount of the credit is USD 3,180,000. Subsequently, the branch bank of China found that the information of the credit has been tampered, such information are the amount, name of the beneficiary and the date of shipment. The branch bank of China inform the Jiang Su trade company, and asked about the credit from the issuing bank immediately. At last, because of they using the overdue credit, so it is can identified as a fraud case. The Hong Kong Company tried to find an excuse and give the overdue credit to the exporter. And during that time the company use as a mortgage and get the money from the bank.

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