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Unfortunately, fraud is a fact of life in most areas of banking, and trade finance is no different.

The ICC Global Trade and Finance Survey 2015 - "Rethinking Trade & Finance" indicated that 18.5% of respondents to its questionnaire had seen an increase in allegations of fraud and 16.1% an increase in incidence of court injunctions being issued (presumably due to fraud allegations or issues of quality of goods).

Fraud disputes - likely scenarios:

• Buyers - the risk of paying for sub-standard or non-existent goods.
• Sellers - the risk of not receiving funds despite having shipped goods according to a contract.
• Banks - the risk of being involved in a fraudulent transaction and an ensuing financial loss.

UK perspective in respect of documentary credits

Courts in the UK take the view that a bank must honour its obligation in accordance with the positions taken in UCP i.e.,

• UCP 600 article 5: banks deal with documents.
• UCP 600 sub-article 4(a): a credit is a separate transaction to the buyer/seller contract; banks are not bound by sales contracts on which a credit is based; a bank undertaking is not impacted by any consequence of applicant relationships with either the issuing bank or the beneficiary.
• UCP 600 article 34: banks have no liability or responsibility for the genuineness or otherwise of any document; banks are not responsible for the content of any document; banks are not responsible for the actions or otherwise of any other party under the credit; banks are not responsible for sales contract disputes.

The Fraud Exception

UCP 600 article 15 states the conditions under which a bank must honour or negotiate a presentation. The only exception to this commitment is fraud. In this respect, such fraud must be ‘proven, i.e.,

• there must be clear evidence of fraud
• the bank must have clear notice of the evidence of such fraud

• the bank's awareness of the fraud is "timely"

 It should be noted that fraud is not a matter for the UCP - it is for the courts to decide as has been clarified in many ICC Opinions.

Landmark court case: "Exceptional Circumstances"

RD Harbottle (Mercantile) Limited v. National Westminster Bank Limited (1978)

"It is only in exceptional cases that the Court will interfere with the machinery of irrevocable obligations assumed by banks. They are the life-blood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contract by litigation or arbitration....... The courts are not concerned with their difficulties to enforce such claims: these are risks which the merchants take. In this case, the Plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitment of banks are on a different level. They must be allowed to be honoured, free from interference by the Court. Otherwise, trust and international commerce would be irreparably damaged."

Injunctions

• It is imperative that banks preserve the autonomy and integrity of the letter of credit as indicated in ICC Opinions R629 and R743.
• It is just as important that they preserve their own integrity and reputation in the market.
• Unless a bank is convinced that a fraud has been committed, it should, in general, seek to have any injunction, preventing payment on the basis of suspected fraud, lifted and released so that the bank can honour it's obligations.

In a Hong Kong case in 2002, UniCredito Italiano SpA v Alan Chung Wah Tang, the court held that:

"...It is well established law that the test is whether, standing in the shoes of the paying bank at the time of payment, the fraud was clear and obvious... If [the] fraud was clear and obvious, ... the bank pays the beneficiary at its own peril and it is not entitled to reimbursement. But if [the] fraud is not clear and obvious, then it is not for a banker to question why the businessman involved in the underlying transaction had chosen to conduct their business in any particular way."

The judge added further:

"... It is clear that fraud must... be alleged [only] when there is sufficient evidence and then it must be alleged specifically with full particulars. It is [an] established principle that it is not fair and just to permit a party to raise a vague unparticularised case in the hope of making it good after discovery."

For more in-depth information regarding Fraud as well as Financial Crime and Sanctions, see our on-line training module ‘Financial Crime, Fraud and Sanctions'.

www.tradefinance.training