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RISK IN THE MANAGEMENT OF INTERNATIONAL LETTERS OF CREDIT IN
COMMERCIAL BANKS
Akramjonov Saidaxmad Baxromjon o'g'li
The Banking and Finance Academy of the Republic of Uzbekistan
https://doi.org/10.5281/zenodo.15349517
International letters of credit (LCs) are essential instruments in global trade, providing
secure payment mechanisms between exporters and importers. Issued by commercial banks,
LCs guarantee payment to the seller upon the fulfillment of specific terms and the
presentation of required documents. This mechanism reduces the risk of non-payment and
builds trust between international trading partners.
Commercial banks serve multiple functions in LC transactions, including acting as the
issuing bank (on behalf of the importer), the advising bank (communicating with the
exporter), the confirming bank (adding an additional payment guarantee), and the negotiating
bank (reviewing documents and potentially advancing funds). Each role carries distinct risks
and responsibilities.
One of the most common categories of risk in LC management is operational risk. This
includes human error, delayed processing, document discrepancies, and lack of procedural
adherence. For instance, failure to comply with UCP 600 standards or inaccuracies in shipping
documents may result in payment delays, transaction rejections, or financial losses.
Given the international nature of LCs, legal risks are significant. Disputes may arise due
to conflicting legal systems or different interpretations of contract terms. For example, a court
ruling in one country may contradict internationally accepted banking practices, putting the
issuing bank at risk of litigation or non-recovery.
Fraud is a critical concern in LC transactions due to the document-based nature of the
system. Fraudulent activities may include the submission of forged shipping documents, fake
bills of lading, or impersonation of legitimate exporters. Such fraud can lead to substantial
financial losses for the issuing and negotiating banks.
Commercial banks must comply with international regulations such as anti-money
laundering (AML) laws, sanctions imposed by OFAC or the EU, and Know Your Customer
(KYC) requirements. Non-compliance may result in legal penalties, frozen transactions, and
damage to the bank’s reputation.
Transactions involving politically unstable or sanctioned countries expose banks to
country risk. This includes the possibility of capital restrictions, foreign exchange volatility,
embargoes, or government interference in the execution of LCs. Banks must conduct thorough
country risk assessments before proceeding with such transactions.
To manage LC-related risks, commercial banks implement a range of measures. These
include establishing internal controls, using automated systems for document verification,
and ensuring staff are trained in trade finance procedures. Adopting a standardized operating
procedure can significantly reduce human error.
Modern trade finance departments integrate AML/KYC screening tools into LC systems
to ensure real-time detection of suspicious entities and sanctioned parties. Strong compliance
departments help prevent regulatory violations and ensure adherence to global financial
standards.
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Digital transformation plays a key role in minimizing LC risks. The adoption of
blockchain platforms, electronic LCs (eUCP), and AI-based verification tools increases
transparency and reduces the likelihood of document fraud or delay. Such systems also speed
up the transaction process.
Banks can also mitigate risks by working with confirming banks or seeking insurance
from export credit agencies (ECAs). These institutions offer guarantees that provide
additional protection against non-payment and political disruptions in cross-border
transactions.
Conclusion
Managing risks in international letters of credit requires a multifaceted approach.
Commercial banks must remain vigilant, adaptive, and technologically equipped to navigate
operational, legal, and compliance challenges. Through structured procedures, regulatory
compliance, and digital innovation, banks can ensure safe and efficient LC operations in the
evolving landscape of international trade.
References:
Используемая литература:
Foydalanilgan adabiyotlar:
1.
Bertrams, R. I. V. F. (2004). Bank Guarantees in International Trade (3rd ed.). Kluwer
Law International.
2.
Ellinger, E. P., & Neo, D. (2010). The Law and Practice of Documentary Letters of Credit
(4th ed.). Oxford University Press.
3.
International Chamber of Commerce. (2007). UCP 600: Uniform Customs and Practice
for Documentary Credits. ICC Publication No. 600, Paris.
4.
Klapper, L., & Randall, D. (2019). Trade Finance Gaps, Growth, and Jobs Survey. World
Bank Group. Retrieved from https://www.worldbank.org
5.
Liu, C., & Yeung, S. M. (2020). Digital Transformation in Trade Finance: Trends and
Policy Implications. Journal of International Banking Law and Regulation, 35(3), 165–178.
