FRAUD EXCEPTION IN LETTER OF CREDIT WITH SPECIAL REFERENCE TO MALAYSIAN LEGAL PERSPECTIVE
Abstract
Letter of credit (LC) is a payment mechanism in international trade which is claimed to provide utmost security to the contracting parties compared to other methods of payment. The security provided by this device however does not extend to fraud risk. The nature of LC transactions and rampant development in technology has opened a pathway for fraudster to capitalize on the dependence of the parties to the LC transactions on paper-based documentation. Since LC documents can be easily fabricated, there are many occasions in which the payment by LC was refused in introductory trade relationship due to suspicion of fraudulent documents. Moreover, the existence of fraud may destroy the smooth flow of LC procedure of payment and cause a disaster to the whole transaction. Consequently, fraud in LC transaction will frustrate the parties involved such as buyer, seller as well as banker. This paper aims to examine the fraud climate in LC transactions with special reference to Malaysian legal perspective. It begins with the general discussion on the background of LC fraud and the fraud exception in the provisions of the Uniform Custom and Practice for Documentary credit (UCP), the Uniform Commercial Code (UCC) and the People’s Republic of China Letter of Credit (PRC LC). Furthermore, it highlights the approaches adopted by the selected court’s jurisdiction in dealing with fraud exception in LC where case law from UK and US were mainly referred to since these two countries have a high volume of cases for LC transactions. In discussion on Malaysian scenario, due regards have been focused on the Malaysian legal framework on fraud provision. In addition, this paper seeks to identify the modus operandi used by fraudsters in LC transactions in Malaysia. Last but not least, it determines the standard of proof adopted by Malaysian courts in dealing with fraud exception in LC transaction.