Combination of Letter of Credit and Telegraphic Transfer
A combination of letter of credit (L/C) and telegraphic transfer (T/T) is a popular means of payment in the undervalue arrangement. The undervalue is an illegal way of reducing or avoiding the import duties and taxes by underdeclaring the price of imported goods. It is a sneaky way of bringing the landed cost of imported goods to a competitive level. The undervalue is being practiced in certain less developed countries, usually involving items whose import duties are relatively high. There is no need to undervalue the goods if the import duty is 10% or less. Sometimes, an item having a 15% rate of duty may not need to be undervalued too, depending on the method of import duty and sales tax calculations in the importing country.

    The undervalue arrangement is highly risky. To avoid trouble the exporter should refrain from using this arrangement. Governments do not encourage exports by undervalue. If an exporter does not violate the foreign exchange control and tax laws of the exporting country and international laws such as copyright and patent, the government of the exporting country usually will not step into the exporter's way in the undervalue arrangement.

    The undervalue arrangement uses two sets of documents. For example, an importer contracted 1,000 pieces of product X at FOB US$8 each for a total of US$8,000. The importer may want to declare 25% only (10% to 50% of contract price is declared usually in the undervalue arrangement) or at US$2 each for a total of US$2,000. One set of documents will show 1,000 pieces of product X at US$2 each for a total of US$2,000, while the other set shows the true value.

    The importer opens an L/C for US$2,000 and remits the US$6,000 balance by T/T. Following the foreign exchange control procedures on exports, the exporter must surrender a total of US$8,000 inward remittances to the government. While at the destination port, the importer pays the duties and taxes based on US$2,000, plus the ancillary expenses required in the arrangement. If the importer is caught at the port of destination, shipments may be seized by the customs.

    The importer has to buy the dollar from the black market and remit it by T/T through a third country. Most often the T/T will not reach the exporter on the agreed time. Quite often, the shipment date arrives before the T/T reaches the exporter.