Analysing The Menace Of Letter Of Credit Fraud

Author: LawSphereX

Category: General Law

Published: 2026-08-23T17:57:08.424Z

Updated: 2026-08-30T07:07:39.861Z

ANALYSING THE MENACE OF LETTER OF CREDIT

FRAUD

Labhanshi & Sanvi Singh, Christ University

ABSTRACT

The paper has investigated and looked into theoretical facet of Letters of Credits (LCs) and its pivotal portrayal in international trade, Finance and Fintech. LCs is used in the process of a guarantee that is issued by banks to assure safe payments between buyers and sellers, therefore reducing risks in cross-border transactions. The analysis has brought out the parties who are involved like buyers, sellers, and banks, and importance of strict compliance with LC terms and conditions which are made. It also looks out the frauds that are happening, with real life case like the Punjab National Bank scam, where loopholes in the system are portrayed. Fraudulent practices, including document manipulation and collusion, are common risks that require robust preventive measures.

The document discloses how technology, FinTech innovations as AI, blockchain, and digital KYC, are now transforming trade finance. It detects fraud, improves transparency, and makes global transactions faster and safer. However, there are still challenges in the form of regulatory gaps and security concerns. Regulatory framework, the encouragement of electronic documentation, and international collaboration to fight fraud. The paper has emphasized the modernization of the trade system which is being done by technology for building trust, ensuring smoother and more secure international trade practices between the parties.

Keywords: Letters of Credits (LCs), International Trade and role of LCs, Fraud in Trade Finance, FinTech and LCs, Punjab National Bank Scam, Role of LCs in Banking Sector, Causes of LC Fraud, Blockchain Technology, Artificial Intelligence (AI), Know your Customer (KYC), UCP600, Regulatory Frameworks, Cross-border Transactions, Types of Frauds, Risk Mitigation in Trade, Building Awareness.

Introduction

to letter of credit: In the broadest sense, a letter of credit means permitting the beneficiary to obtain credit from another person1. A letter of credit is a letter that is issued by a bank guaranteeing payment from buyer to seller will be received on time and in the same amount. If the buyer is unable to make payment for the purchase, then the bank is liable to pay the seller. In exchange, the bank takes collateral as goods from the buyer; a letter of credit is very crucial for mitigating risks in transactions, especially when there is a huge reduction in exports due to an economic crisis such as at the time of the Covid-19 pandemic; the goods traded in a letter of credit are found to be more resilient.

Trading goods across the borders of different countries has always been riskier than the trade that happens between national borders because the people between whom the trading is taking place are in two different countries, which takes time to cover, and then there can be some differences too, as they are subjected to different laws. A letter of credit reduces or evicts the risk to both trading parties. An LC is used as a guarantee that is issued by the importer's issuing bank, which means that a payment will be made to the exporter, and the conditions stated in the LC have been fulfilled. 2 Key parties to letter of credit: Seller (beneficiary): the party who is entitled to receive the letter of credit upon fulfilling some conditions. typically, the exporter or supplier of goods and services Buyer: the party who is asked for the allotment of the letter of credit.

typically, the importer or the purchaser Issuing bank: the bank that issues a letter of credit on behalf of the buyer to the seller and also provides a guarantee of payment to the seller upon fulfilling the letter of credit terms. Confirming bank: Add its guarantee to the letter of credit. Mostly involved when the issuing bank is at a distance raises concern to the seller.

1 McCurdy, W. E. (1922). Commercial Letters of Credit. Harvard Law Review, 35(5), 539–592.

https://doi. org/10. 2307/1328326 2 Crozet, M. , Demir, B. , & Javorcik, B. (2022b). International Trade and Letters of Credit: A Double-Edged Sword in Times of Crises. IMF Economic Review, 70(2), 185–211. https://doi. org/10. 1057/s41308-021-00155-3 Negotiating bank: it inspects the documents for compliance. And process the payment on behalf of the issuing bank or confirming bank. Advising bank: Transmit the letter of credit details to the seller, ensuring that the seller understands the condition and requirement for the payment. 3 LC FRAUD AND ITS PREVALENCE IN BANKING SECTOR: LCs secure the interest of all parties involved in international The bank has to make payment at the time when the seller ships the goods, and the necessary documents are presented to the bank to give evidence of the shipped goods as per the terms that are mentioned in the contracts.

Whenever a bank issues a letter of credit to the involved parties, that credit becomes a different, separate contract from the underlying transaction on which the credit is based. This independent nature of a letter of credit makes it the lifeblood of international trade and commerce. 4 Letters of Credit are used by most of the people who are involved in international trade, and here LCs are a means of financing and payment that accelerates the process of trade, but the principle of independence of LCs makes them sensitive to the risk of fraud. There can be many types of fraud that take place, such as defrauding the applicant, the issuing bank, the confirming bank, and the insurance company. These frauds can impose significant costs on the enterprise. Therefore, measures should be taken to include fraud risk in the core of the enterprise risk management (ERM) program. 5 -.

77 billion scam done by Nirav Modi, which is widely known as the Punjab National Bank scam, where fraudulent Letters of Undertaking, which are similar to the Letters of Credit, were issued by colluding bank employees without proper authorization. These LoUs accelerated unsecured currency loans by foreign countries, but these were never repaid, which ultimately made PNB liable. This scam exposed vulnerabilities in trade finance systems, eroded trust in banking, and led to stricter regulations for LCs and 3 Soni, M. , Pritchart, J. , Mallaya, S. P. , & Bulger, R. (2024). Letter of Credit: a Legal Perspective. In International Journal of Law Management & Humanities & The Balance, International Journal of Law Management & Humanities (Vol. 7, Issue 3, p. 3764) [Journal-article]. http://banking. about. com/od/businessbanking/a/letterofcredit. htm 4 Raje, M. (2021).

Role of letters of credit in international trade. International Journal of Law, 7(3), 75–79. https://www. lawjournals. org 5 Alavi, H. (2016). Mitigating the risk of fraud in documentary letters of credit. Baltic Journal of European Studies, 6(1), 139–156. https://doi. org/10. 1515/bjes-2016-0006 related instruments. 6 Common justifications for the use of the letter of credit fail to explain its widespread use7. These days LCs are used on the domestic level as this financing device LCs can be invoked as both a primary or a secondary means of financing. When the letter of credit is brought to bear as a primary source of financing, the trader will have to draw drafts on a bank, and the correspondent is ultimately obligated to reimburse the bank from funds of their own or a loan.

The letter of credit is maneuvered as a secondary means of payment, which is if it is to be utilized only when there is some contingency. 8 ROLE OF FINTECH IN TRADE FINANCE: FinTech involves the use of technology to enhance business models, providing clients with more efficient and advanced financial services. 9 It is easy to describe fraud, but detecting fraud is much more difficult for the reason that fraud is an adaptive crime, and so the need for largescale financial datasets is high. FinTech has its own critical role in forfending fraud by imposing advanced technologies that have been developed, like AI, machine learning, and blockchain. These developments have helped in enabling a safe transaction oversight, with predictive analysis and by time fraud detection.

Also, FinTech solutions enhance identity verification, automate regulatory compliance, and lower financial system risks while fostering transparency and guarding against fraud and cyberthreats. 10 Frauds which are targeting the insurance companies, the issuing bank, the confirming bank, and the applicant are among the many types of frauds that frequently target exporters. In letters of credit, fraud between the applicant and the issuing bank takes the form of collusion, inflated bills, fraudulent transactions, and document falsification, which leads to improper payments 6 Gayathri, S. , & T, M. (2018). A Critical Analysis of the Punjab National Bank Scam and its Implications. SSRN Electronic Journal. https://papers. ssrn. com/sol3/papers. cfm? abstract_id=3274568 7 Mann, R. J. (2000). The role of letters of credit in payment transactions. Michigan Law Review, 98(8), 2498.

https://repository. law. umich. edu/mlr/vol98/iss8/4 8 Logan, J. W. , & Logan, G. W. (1969). Letters of credit: their use in domestic financing. South Carolina Law Review, 22(3), 381. https://scholarcommons. sc. edu/sclr 9 Stojanović, B. , Božić, J. , Hofer-Schmitz, K. , Nahrgang, K. , Weber, A. , Badii, A. , Sundaram, M. , Jordan, E. , & Runevic, J. (2021). Follow the trail: Machine Learning for fraud detection in fintech applications. Sensors, 21(5),

1594. https://doi.org/10.3390/s21051594

10 Roszkowska, P. (2020). Fintech in financial reporting and audit for fraud prevention and safeguarding equity investments. Journal of Accounting & Organizational Change, 17(2), 164–196. https://doi. org/10. 1108/jaoc-09- 2019-0098 based on manipulated or deceptive papers. 11 The fraud that happens the most is when the letter of credit clauses differs from the contract. Fraud in the actual world happens when applicants try to manipulate terms and make unlawful payments, because of which some differences between the LC clauses and the contract start arising. Banks are also prone to such scams in which the importer and exporter collude to provide fictitious letters of credit just to deceive the issuing bank. 12 In the case Bank of Montreal v.

Mitsui Manufacturers Bank, the issuer's actions were assessed under Shenanigans tests, but the court had determined that the tests were not satisfied in this unusual standby arrangement. Deference to Shenanigans in such cases is criticized for undue credibility. In another such case, American National Bank & Trust Co. v. International Seafoods of Alaska, the question was on jurisdiction for assignees of letters of credit proceeds. The court found that the assignment of proceeds and the associated actions established sufficient contacts for jurisdiction in Alaska. The ruling raised concerns, as it was based on actions not directly involving the credit itself. The difficulties which courts encountered in striking a balance between the reality of international and interstate commerce and the standards of jurisdiction were showcased in the Shenanigans Knits ruling.

The idea that letters of credit should not expose issuers to jurisdiction in remote forums may be undermined by the court's reasoning, though it found jurisdiction in this case. Courts should exercise caution when extending their authority to prevent compromising the autonomy and usefulness of letters of credit for business purposes. 13

LEGAL FRAMEWORK

OF LETTER OF CREDIT FOUNDATIONAL PRINCIPLES OF LETTER OF CREDIT: Principle of autonomy: 11 Alavi, H. (2016). Mitigating the risk of fraud in documentary letters of credit. Baltic Journal of European Studies, 6(1), 139–156. https://doi.org/10.1515/bjes-2016-0006 12 Smith, J., Doe, A., & Johnson, R. (2020). The risk and prevention of letter of credit fraud. International Journal of Trade and Finance, 15(2), 45-60. https://webofproceedings.org/proceedings_series/ESSP/ICEMEET%202020/ICEMEET20049.pdf 4o mini

13 Barnes, J. G., & Byrne, J. E. (2013). Letters of Credit. The Business Lawyer, 68(4), 1227–1238.

http://www. jstor. org/stable/23526803 The written letter of credit is exactly different from the other contracts. It is specifically stated in Article 4 of the UCP 600 that a credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such a contract, even if any reference whatsoever to it is included in the credit14. . It was first accepted in the case of Urquhart Lindsay & Co Ltd v Eastern Bank Ltd15. In the case of Tarapore and Co. , Madras v. V. O. Tractors Export, Moscow, the Supreme Court of India stated that “the letter of credit has definite significance. It is independent of and unqualified by the contract of sale and other underlying transactions “. The autonomy of transaction should be bound to be protected, and the court should not interfere with that.

16 The doctrine of strict compliance: “Strict compliance” means that specific documents should precisely comply with the terms of the contract. This is the reason why the documents are checked before activating the letter of credit. As per Article 5 of UCP600, it is stated that the bank specifically deals with the documents, not the fundamental goods or services. It is the obligation of the bank to check documents and decide whether to honor them or not. by the time examination of documents in letters of credit has shifted from strict compliance to the content of the compliance. To address this issue, international standard banking practices, introduced by ICC, systemize the process so that now banks will evaluate the content rather than titles or format17. In the case of Mercantile-Safe Deposit & Trust Co. v.

Baltimore County, the court adopted a balanced strict compliance standard; it modified this inflexibility by allowing minor, immaterial errors, such as topographical errors, provided they do not harm or mislead the issuer18. INTERNATIONAL RULES GOVERNING LETTERS OF CREDIT: UCC (UNIFORM COMMERCIAL CODE) Historically, there were very few case laws and no statutory law that governed letters of credit

14 Jančíková, E., & Pásztorová, J. (2021b). LEGAL ASPECT OF LETTERS OF CREDIT (Vol. 10)

15 Biswas, L. C., Independent University, & Stamford University Bangladesh. (2011). Letters of credit: A theory on the legal basis of the payment obligation of issuing bank. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2043174 16 Soni, M. (2024). Letter of Credit: a Legal Perspective. In International Journal of Law Management & Humanities & The Balance, International Journal of Law Management & Humanities (Vol. 7, Issue 3, p. 3764) [Journal-article]. http://banking.about.com/od/businessbanking/a/letterofcredit.htm

17 Jančíková, E., & Pásztorová, J. (2021b). LEGAL ASPECT OF LETTERS OF CREDIT (Vol. 10).

Byrne,

J.

E.

(1988). Letters of Credit. The Business Lawyer, 43(4), 1353–1406. http://www.jstor.org/stable/40686959

before the arrival of the UCC (Uniform Commercial Code). UCC provides clearness and uniformity. ARTICLE 5: It governs letters of credit in the US. It provides a uniform set of rules and regulations, and it helps to systematize the practices related to letters of credit. It mainly focuses on documentary letters of credit. UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDIT ( UCP600) When different countries are parties in international trade, the UCP600 published by the INTERNATIONAL CHAMBER OF COMMERCE (ICC) is the main regulatory framework ruling letters of credit19. Subsequently, the same has been amended in the years of 1951, 1962, 1974, 1983, 1993, and 2007 (UCP600). Till date, this has been accepted by 175 countries. It follows strict compliance rules, which means documents should rigidly comply with the terms of the letter of credit.

THE INTERNATIONAL STANDBY PRACTICES (ISP98) Standby letters of credit have their origin long before there was a legal lacuna to bring uniformity. The Institute of International Banking, Law, and Practice brought specific regulations for standby loc. These regulations were adopted in 1998 by the International Chamber of Commerce. The latest version of ISBP is 82120. eUCP: It is a supplement to UCP. It was formed by ICC in April 2002; this is designed to address the issue of electronic trade. It bridges the gap between traditional paper-based credits and electronic-based ones. The latest version is 1. 1, which covers the issues of format, originals, and eUCP-UCP relations, enabling secure, efficient global trade. Article 2 highlights the uniformity of all articles of eUCP with UCP while it applies only in the case of electronic 19 Gewolb, R. J. (1966).

The law applicable to international letters of credit. Vill. L. Rev. , 11(4), 742. https://digitalcommons. law. villanova. edu/vlr/vol11/iss4/9 20 Soni, M. (2024). Letter of Credit: a Legal Perspective. In International Journal of Law Management & Humanities & The Balance, International Journal of Law Management & Humanities (Vol. 7, Issue 3, p. 3764) [Journal-article]. http://banking. about. com/od/businessbanking/a/letterofcredit. htm presentation21. INDIA REGULATORY FRAMEWORK: India is lacking in terms of regulation of letters of credit transactions, and there are no statutory laws that specifically deal with letters of credit. But all foreign transactions are governed by FEMA (Foreign Exchange Management Act), 1999.

This act has been enacted to govern all foreign transactions and trade and to promote regulation and development of the foreign exchange market, and the term foreign exchange includes letters of credit. The Reserve Bank of India has the duty to keep checks and balances of the various provisions of the act. As India is a party to UCP600, which applies to banks in India22. INTERNATIONAL TRADE LAW In addition to UCC and UCP600, there are international trade laws that can come into the picture when a letter of credit is used; these laws address issues such as the role of custom practices and the legality of some documents. The use of letters of credit can be influenced by a variety of international trade agreements, including those administered by the World Trade Organization.

These agreements assist and ensure that international transactions are performed fairly and transparently, with specific requirements on banking procedure, payment methods, and resolution of trade disputes23.

CHALLENGES

IN REGULATORY FRAMEWORK: In spite of international laws and UCP600, there is still a legal lacuna in addressing issues like fraud in cross-border transactions. Countries such as China and India are often left to handle the issue of fraud in documentary credit with restricted resources and inconsistent guidelines. This is due to a lack of universally accepted, enforceable regulatory frameworks. 21 Alavi, H. (2016). Documentary Letters of Credit, Legal Nature and Sources of Law. Journal of Legal Studies, 17(31), 106–121. https://doi. org/10. 1515/jles-2016-0012 22 Jain, S. (2014). Commercial instruments: bank guarantee and letter of credit. SSRN Electronic Journal. https://doi. org/10. 2139/ssrn. 2460246 23 Gewolb, R. J. (1966). The law applicable to international letters of credit. Vill. L. Rev. , 11(4), 742. https://digitalcommons. law. villanova.

edu/vlr/vol11/iss4/9 LESSONS FROM GLOBAL PRACTICES ON DOCUMENTORY FRAUD Different countries have different regulations in addressing issues like fraud. US: This has been judicially addressed; first, it is codified under UCC Article 5 Section 109, which deals with fraud and forgery but does not specify the type. UK: has adopted a more strict approach in R. D. Harbottle (Mercantile) Ltd v. National Westminster Bank Ltd. It introduced a fraud rule in UK courts. They are more concerned with the intention of fraudsters. They have divided fraud into 4 main types. China: It lacks a regulatory framework. The general principles of civil law and contract law provide the framework, and it follows UCP400 principles. Canada: They are heavily influenced by the UK. They focus on the standard of proof rather than any fraud definitions.

RECOMMENDATION

THAT INDIA SHOULD ADOPT: Firstly, to address the issue of fraud, India should adopt a specific regulatory framework that codifies fraud exceptions and defines standards as well as an evidentiary regime. It should align its laws with best practices like UCC. Secondly, the internal practices of banks lead to massive fraud. RBI must introduce strict managerial mechanisms and should also mandate transparent and uniform accounting standards. Thirdly, to possess proper cyber safety, electronic forms of instruments should be encouraged to promote e-documents; India should adopt the international framework of e-documents outlined by UNICTRAL. Fourthly, to develop cross-border prevention mechanisms and promote mutual assistance for prosecuting offenders, India should join forces with international organizations and trading partners24.

24 Mallaya, S. P. (2018). DOCUMENTARY CREDIT FRAUDS

NEED FOR REGULATION OF BANKING SECTOR IN INDIA. Journal of the Indian Law Institute, 60(2), 216–236. https://www. jstor. org/stable/26826637 THE ROLE OF TECHNOLOGIES IN FINTECH, TRADE AND IN PREVENTING LC FRAUDS: Fintech has already emerged as one of the most transformative forces that has been used in global trade these days, not to say that it has also reshaped some of the traditional processes of international trade and business that were earlier being followed by enhancing efficiency and transparency in international and national trade as well with the help of tools like AI, blockchain, and digital KYC.

There is a need to mention that the recent integration of these advanced technologies, such as blockchain, artificial intelligence, and big data analytics, is driving innovation in trade finance ahead of its time, which is good; it has also reduced the transaction costs, and for mitigating risks, too, these new technologies are doing wonders. In the world of international trade, fintech is that one factor which facilitates smooth cross-border transactions, that has easily enabled businesses to access global markets with greater ease. Algeria is one such example that we should pay attention to as it is one of the key players in Africa and also in the Mediterranean trade that is happening at a large level, and it is gradually embracing fintech as part of its broader efforts to modernize its economy.

Still, the adoption of Fintech in Algeria remains in its infancy, presenting both significant opportunities and challenges. The study also highlights the barriers to adoption, including technological limitations and the need for capacity-building within Algerian financial institutions, which is the priority. Technologies like AI, blockchain, and digital KYC (Know Your Customer) have a crucial role and a great impact in automating and optimizing various processes that happen in trade finance.

AI can easily analyse large datasets to assess the creditworthiness of the involved parties and identify potential fraud, while blockchain has enabled all its parties involved in trade, like exporters, importers, and banks, to access a single source of truth, reducing disputes and improving trust, which helps in achieving transparency and trust in trade which is really important in trade or any other business, Digital KYC is also a system which ensures that there is adherence to anti-money laundering (AML) and counter-terrorism financing (CTF) regulations as it already continuously monitors and flags out the suspicious activities 25. BLOCKCAHIN TECHNOLOGY: The world has started using blockchain technology, which is helpful in faster payments across 25 Hassiba, A. , & Zakaria, H. (2024). Fintech in International Trade: Opportunities and Challenges from an Algerian Perspective.

Journal of Economics and Human Development, 15(2), 103–193. https://www. researchgate. net/publication/387428087 borders, identity management, smart contracts, cryptocurrencies, and supply chains. Blockchain technology is an innovation, just like the Internet, and is being used widely these days. It can be said that blockchain is a revolutionary technology that is helping reduce security risks by eliminating fraud of letters of credit and bringing transparency to these transactions too. 26Blockchain is a digital system for recording transactions that can be easily visualized as an important part of intelligent algorithms and collected data and secured by cryptography. Whether it is financial markets, healthcare, or the military, enterprises and governments are both using blockchain technologies.

It has applications that began in the finance industry, but it is expanding to government, healthcare, and others. 27 There are many challenges as well with the application of Blockchain Technology. Optimization of the storage capacity and to address the issue of heaviness in the blockchain, a new and innovative scheme of cryptocurrency was proposed. ARTIFICIAL INTELLIGENCE (AI): Another different tool from Blockchain is artificial intelligence (AI), which aims at making intelligent machines. The concept of AI-empowered has gained increasing popularity in a few years. AI has the potential to do tasks easily, and it can also engage with individuals, generate insights, make decisions, and support innovation. With AI it is easy to identify the actionable objectives needed to realize its value, and assessing and working on frauds of Letters of Credit has become much easier.

The fintech field’s tasks and concepts are now being redefined as the effects of AI, from the operation of financial organizations to the way participants interact, and it raises new financial mechanisms. Everything is in control with the help of AI, and its empowered finance has promoted a new world of smart digital currencies and risk management. If we are taking the substantial quantity and diversity of AI into consideration of significant importance, AI also looks up to assessing loan applications with neural networks and approving credit with rule-based expert systems in letters of credit in international trade. The recent development in the technology of AI helps to improve the efficiency of financial firms and the quality of financial services and products by reducing their cost and focusing more on productivity.

Because of AI technology, now security companies are also building an 26 Habib, G. , Sharma, S. , Ibrahim, S. , Ahmad, I. , Qureshi, S. , & Ishfaq, M. (2022). Blockchain Technology: Benefits, Challenges, Applications, and Integration of Blockchain Technology with Cloud Computing. Future Internet, 14(11), 341. https://doi. org/10. 3390/fi14110341 27 Mackey, T. K. , Kuo, T. T. , Gummadi, B. , Clauson, K. A. , Church, G. , Grishin, D. , ... & Liang, B. A. (2019). Blockchain technologies: Opportunities for solving real-world problems in healthcare and biomedical sciences. Journal of Medical Internet Research, 21(2), e12406. https://doi. org/10. 2196/12406 application system where people can analyze internal and external data and identify hidden risks.

28 KNOW YOUR CUSTOMER(KYC): Know Your Customer (KYC) is an essential process and legal requirement that financial institutions and other regulated entities are made to follow so that there can be identification and authentication of the customers and gathering and verification of the necessary information that is needed for conducting financial transactions in international trade. Just like AI and blockchain technology, this KYC is also one of the tools that is there to prevent fraud in letters of credit. Numerous countries have already implemented e-KYC (electronic Know Your Customer) regulations that will help them address the demands of the digital and mobile landscape in the present.

29 It is agreed that these new technologies come up with great innovation, but they have their challenges and concerns because this sector continues to adopt these technologies at a growing pace; understanding these challenges is essential for the traders to ensure a smooth transition and maintain trust amongst the involved parties. One such big concern of these technologies is security. 30 SOLUTIONS TO LC FRAUDS FOR PARTIES: Fraud in letters of credit Transactions have become very common in trade now, but the risk of potential fraud will automatically increase if the parties involved are unaware of the threats, and the anti-fraud preventive measures that can help them reduce the likelihood of being a victim of fraud are not in place, as defrauders always target companies that do not have any effective regulatory measures to protect their interest.

They just easily guard themselves by finding legal loopholes in different jurisdictions. 31 The documentation process during the trade is not entirely under the control of the exporter, and for some documents, the parties have no 28 Siau, K. L. , Nah, F. F. H. , & Qian, Y. (n. d. ). Artificial intelligence in financial technology: CSWIM (Short paper). City University of Hong Kong. https://www. researchgate. net/publication/362832759 29 Verma, K. , Kumar, R. , Rao, A. P. , & Ranjan, R. (2023). Efficient e-KYC Authentication System: Redefining customer verification in digital banking. 2022 8th International Conference on Signal Processing and Communication (ICSC), 319–324. https://doi. org/10. 1109/icsc60394. 2023. 10441596 30 Parate, S. , Josyula, H. P. , & Reddi, L. (2023).

Digital Identity Verification: Transforming KYC processes in banking through advanced technology and enhanced security measures. International Research Journal of Modernization in Engineering Technology and Science. https://doi. org/10. 56726/irjmets44476 31 Rafique, R. B. , & Venugopal, A. V. (2021). Preventive measures to mitigate the risk of fraud in letters of credit transactions in Malaysia. UUM Journal of Legal Studies, 12(1), 27–49. https://doi. org/10. 32890/uumjls2021. 12. 1. 2 choice but to find a solution to manage the risk of documentary discrepancy in LC operations to receive his payment on time.

32 Conclusion: Letter of credit act as very important instrument of international trade as it bridges the gap of trust between buyer and seller, it also enables flawless transaction across international borders, however there are some fraud risk seen in PNB scam this scam highlights vulnerability in trade finance system , fraying trust which shows the need of stricter regulations , growing complexity of international trade demands sturdy mechanism to prevent exploitation. To address these issues technological innovations specifically in fintech emerged as a powerful tool. To reduce document manipulation and fraud blockchain technology provides an immutable and transparent ledger. To detect real time fraud detection, which enable financial institutions to act quickly against irregularities AI plays an important role.

To safeguard the transactions malicious actors digital KYC systems streamline identify verification and ensure compliance with anti-money laundering (AML) and counter terrorism financing (CTF) regulations which plays an important role, together all these technologies enhance transparency and security in the LC process. In spite of this advancements there are challenges, countries like India where there is legal lacuna and infrastructural gaps that limit the prevalent adoption of these solutions. Absence of unified regulatory framework for letter of credit increases the risk of fraud, it is recommended to link domestic regulations with international best practices such as UCP 600 and UCC, additionally India must regulate and strengthen it internal bank control and also facilitate the use of e -documents to enhance cyber security.

Fraud prevention requires the collaboration between the trading partners to coordinate amongst standards, and prosecute offenders this can be done by cross border collaboration. There should be capacity building initiative should focus on educating stakeholders about regulatory framework, technological tools and risk associated. In conclusion, future of trade lies in combining of technology, regulatory alignment, and 32 Garg, A. (2023). Letters of credit challenges & financial loss faced by exporters in the form of documentary discrepancies. International Journal of Novel Research and Development, 8(1), d303–d309. https://www. ijnrd. org/papers/IJNRD2301334. pdf international cooperation. These will not only mitigate fraud risk but also make LC as a trusted and reliable instrument.

By encouraging the culture of transparency, accountability, and innovation the global trade can achieve sustainable growth.