Letter of Credit - Risk Situations in Letter-of-credit Transactions

Risk Situations in Letter-of-credit Transactions

Fraud Risks

  • The payment will be obtained for nonexistent or worthless merchandise against presentation by the beneficiary of forged or falsified documents.
  • Credit itself may be forged.

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

Force Majeure and Frustration of Contract

  • Performance of a contract – including an obligation under a Documentary Credit relationship – is prevented by external factors such as natural disasters or armed conflicts

Risks to the Applicant

  • Non-delivery of Goods
  • Short shipment
  • Inferior Quality
  • Early /Late Shipment
  • Damaged in transit
  • Foreign exchange
  • Failure of Bank viz Issuing bank / Collecting Bank

Risks to the Issuing Bank

  • Insolvency of the Applicant
  • Fraud Risk, Sovereign and Regulatory Risk and Legal Risks

Risks to the Reimbursing Bank

  • no obligation to reimburse the Claiming Bank unless it has issued a reimbursement undertaking.

Risks to the Beneficiary

  • Failure to Comply with Credit Conditions
  • Failure of, or Delays in Payment from, the Issuing Bank

Read more about this topic:  Letter Of Credit

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