5.2. Approaches to Resolving the International Documentary Letters of Credit Fraud Issue

Public examination of a doctoral dissertation in the field of law
Doctoral candidate: LL.M. Yanan Zhang
Time and venue 5.2.2011 at 12 noon, AU100, Aurora, Joensuu Campus

The focus area of the research generally falls in the field of financing of international trade. This research is about different approaches towards resolving the international documentary letters of credit fraud issue. The documentary letter of credit (L/C) is an important payment method and financial instrument in international trade. L/C was created in trade and business and has a long history. Generally, L/C is a document issuing mostly by a bank, promising payment where the receipt of the letter presents to the bank stipulated documents during specific time. Two fundamental principles of L/C are independence and strict compliance. In an international L/C transaction, normally four different and independent contracts between different parties are involved.

The operation of L/C was standardized in UCP 600, which is used widely all over the world. However, the usage of L/C has been challenged by the occurrence of fraud. No satisfactory solutions to the international L/C fraud problem have been found so far either on national or international level. The approaches explored in the study combine legal and business perspective.

The legal approach includes both criminal law approach and civil law approach. Fraud, as a crime, can be tackled under criminal law regime. However, the criminal legal remedy can be ineffective due to procedural problems between different jurisdictions. Fraud exception, as a judicial remedy to fraud in litigation, are examined under civil law regime.

The procedural instruments dealing with fraud exception are injunctions or stop-payment orders. We examine fraud exception rules in the UNCITRAL Convention at international level, and mainly in England and China at national level. England is in many respects the mother country of L/C and the English courts have developed internationally affluent L/C case law. China plays an increasingly important role in international trade. In China, L/C is frequently used; but often it is abused for fraudulent purposes.

The approaches toward the fraud exception rules both in England and China are analyzed and evaluated mainly through case law study. With a comparative approach, we have found that the approach in China to fraud exception rules is to study different models in other countries and international rules, learn ideas from them, and then adapt them to its own context. We claim that it is a phenomenon of legal transplant (a more proper term: legal adaptation), which is a common method of reforming law in China. The essence of fraud exception rules is to decide which party’s right to protect, and it is mainly a process of balancing different interests of different parties in international L/C transactions.

Then we explore arbitration and other alternative methods (such as the DOCDEX rules and mediation) for litigating international L/C fraud disputes. In the part of arbitrating L/C fraud, it has dealt with the questions relating to arbitrability of fraud, the independence principle of arbitration agreement, interim measures in arbitration proceedings, and the possibility of issuing punitive damages in arbitration and the enforcement of arbitral awards. The research findings have shown that arbitration is possible, though several difficulties can occur in practice; the DOCDEX rules are not suitable for resolving L/C fraud disputes; negotiation or mediation is likely to be more effective when combined with some legal measures than being employed alone.

The final approach is a preventive and proactive approach, which is from business perspective. We have worked out several preventive measures for buyers, sellers, banks, and lawyers. Moreover, we have found that electronic L/C cannot totally protect L/C from the abuse of fraud.

The doctoral dissertation of LL.M. Yanan Zhang, entitled Approaches to Resolving International Documentary Letters of Credit Fraud Issue, will be examined at the Faculty of Social Sciences and Business Studies. The opponent in the public examination will be Professor Lingyun Gao of the Fudan University and Professor Juha Karhu of the University of Lapland, and the custos will be Professor Soili Nystén-Haarala of the University of Eastern Finland.

Dissertation in PDF format

Photo available for download at http://www.uef.fi/vaitoskuvat


Publishing year: 2011

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