Risk Analysis Loc

International Journal of Business and Social Science

Vol. 4 No. 9; August 2013

Risk Analysis of Letter of Credit
------Based on Principles of ‘Independence’ and ‘Strict Compliance’
Yan Hao Lecturer in Economics School of Economics and Management, Sichuan University of Science & Engineering Sichuan Province, China Ling Xiao Lecturer in Law Law School, Sichuan University of Science & Engineering Sichuan Province, China

Based on the UCP 500 and UCP 600, this paper analyses the two principles of letter of credit, in order to prepare the theory basis for the risks analysis afterwards. For the different parties (exporter, importer, banks), possible risks and frauds are shown with case studies. The paper also puts forward the advice for various risks and intends to indicate that risks still exit in letter-of-credit transaction even it is the safest method of payment nowadays in international trade. Those risks may happen on each party, which is not only the exporter, but also the importer and banks. Rights for each party always come with the appropriate obligations.

Keywords:letter of credit, principle of independence, principle of strict compliance 1. Introduction
As the payment instrument, letter of credit has become widely used in international trade. Letter of credit is even described as ‘…the life-blood of international commerce…’1. Letter of credit takes care of the interests of both the exporter and importer, so it is considered to be the most effective and safest method to secure the payment in an international trade transaction. The legal basis of letter of credit is UCP 5002, which is published by ICC3. As the international convention for the letter-of-credit transaction, UCP 500 holds the most important doctrines for the using of letter of credit --- the two principles --- principle of independence and strict compliance. 4 In the real practice, these two principles are the amulet that can secure the payment for both exporter and...