On speaking to counterparties in the trade finance world one comes across a jarring misconception. A lot of trade funds believe that Letter of Credits (LCs) have more fraud risk than invoice financing. It’s true that in any trade instrument fraud risk can be mitigated but not fully eliminated. But this perception that LCs have more fraud risk have no basis in fact. The reality, as proven by the ICC commission data (see figure above), is diametrically opposite. So what could be the reason behind such a perception? In our view this could be because of a flawed path of information discovery which is typically a function of geographical proximity and informal networks. LCs are used primarily in developing countries rather than OECD countries where these Trade funds are typically based. With trade finance and trade flow information being largely fractured, there aren’t too many credible data points in the industry that can be used as benchmarks. There is a need to dispel this myth that LCs carry more fraud risk, when they have exceptionally low default rates.