Study of the fraud exception rule in letters of credit in China and proposed amendments to the Chinese credit system

Abstract

A letters of credit is an important payment instrument. Nevertheless, various forms of fraud with respect to the credit have emerged and seriously affected transaction security. To solve this problem, the fraud exception rule has been proposed, which allows the stop of a payment in instances of fraud even when presenting documents that are in accordance with the terms of the credit. This paper analyses the fraud exception rule for letters of credit by focusing on proposed amendments to the Chinese credit system. First, it traces the chronological development of the Chinese regulations for the fraud exception rule and then examines the current limitations of these regulations with respect to certain crucial issues. Based on these examinations, this paper proposes amendments to the Chinese credit system as a means to address its limitations and reasonably prevent fraud in letters of credit.