Fraud Risks
There are various types of
fraud like documentary fraud, counterpart fraud,
insurance scams, cargo theft, scuttling and piracy. The payment will be
obtained for nonexistent or worthless merchandise against presentation by forged or falsified documents.
Credit itself may be funded.
Sovereign and Regulatory Risks
Performance of
the
Documentary Credit may be prevented by government
action outside the control of the parties.
Legal Risks
Possibility that performance of a Documentary Credit may be disturbed by legal action relating directly to the parties and their rights and
obligations under the Documentary Credit
Risks to the Issuing Bank
Insolvency of
the
Applicant
Fraud Risk, Sovereign and Regulatory Risk and Legal Risks
Country Risk: The factors usually associated with this type of risk are the political and economic stability of a country, exchange controls, if any, and the country's penchant for protectionism of
domestic industry at short notice. All these factors will determine
whether the country can and will honor their payment commitments-in time.
Foreign Exchange Risk
Payments and receipts in foreign currency are an everyday occurrence in
international trade and the trader is always at the mercy of
exchange rate
fluctuations due to various economic, political and
even purely speculative reasons.
Insolvent Applicant: In case of insolvency of the importer, it would be difficult to trace the proceeds of the goods.
Steps that can be taken to minimize these risks:
1. The bank may not deals with unknown or unrenowned importers in case of large amount of transaction
2. Before opening LC, the bank should take steps to obtain credit report of the
foreign exporter. Bangladesh Bank also requires
the
banks to obtain credit
reports when the LC exceeds certain amount.
3. Bank must not need to finance when it knows a tendered document either
contains documents by the parties to be false or contains a forged signature or
a fraudulent alteration.
4. Bank must examine all documents stipulated in the credit with reasonable care,
to
ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions.
5. In case of LIM facility, sometimes collateral in the form of landed property is
also be taken in addition to hypothecation/ pledge of the goods imported to
secure liquidation of
the loan in time