Letter of Credit
(L/C) is a very common method of payment in overseas
transactions. Consequently, exporters and importers
are particularly vulnerable for this kind of scam
and need to remain ever alert. The magnitude of
the scam is usually very high and has the potential
to bankrupt a running business.
Please note - we are discussing here fake L/Cs
NOT payment obstacles in a genuine L/C. For information
on L/C payment and possible loopholes Please read
'Letter of Credit - How to Secure your Payment'
in back issues of Trade-Journal.
Role of Bank in Letter of Credit
Letter of Credit, as its name implies, is a letter
that extends a line of credit to an individual
or business entity. It is prepared by a bank on
behalf of one of it's customers. There are official
guidelines on language and format of Letter of
Credit set up by International Chamber of Commerce
(ICC). Please see earlier issues of FAIDA for
details
Usually the parties involved in a Letter of Credit
are:
- Buyer
- Buyer's bank
- Beneficiary
- Beneficiary's bank.
A basic Letter of Credit is a financial contract
between the bank, the bank's customer, and the
beneficiary, involving the transfer of goods or
services against funds. In other words, it is
a form of Banker's acceptance and certificate
that the bank is substituting its own creditworthiness
and good name for that of its customer.
Thus the role of Bank plays major part in acceptance
of L/Cs between parties who may be otherwise unknown
to each other and separated by great geographical,
cultural and language barriers.
Consequently, measure of genuineness of the issuing
bank could often be the yardstick to measure acceptability
of a L/C
Offering L/C for securing loans
In this scheme, fraudsters offer L/C from questionable
banks for securing loans. The e-mail or letter
from the fraudster may look like following:
e-mail
from fraudster
We Provide you with Letter of Credit L/C
for minimum of US $500000 upto US$50 million
for the purpose of availing bank loans from
your banks. You can use our Letter of credits
L/C to avail facilities from your bank like
Packing credit or just discount our L/c
to have enough funds to meet your requirements.
This Accommodation L/C is for parking purpose
only and no cargo need to be sent. Its available
for 90 or 180 days, at sight and irrevocable.
Revolving L/C after 180 days can be provided.
Our charges are 4% of the L/C value, L/C
can be for any product or commodity subject
to the international restrictions.
You get required funds from your banks
against our L/C and repay promptly before
time limit or extend L/c validity.
Write with address ,Tel & Fax numbers
and amount L/C is required.
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After payment of legal fees and commission, the
L/C may or may not come. Even if it comes, it
will be forged or from a non-existent bank. There
is a double catch in this scam. The victim not
only looses money but may not approach the police
or prosecution agencies as he also has taken part
in this fraudulent scheme.
Selling Fake L/C
Fraudsters, in the guise of export broker, procure
fake L/C (as described above) and sell it to unsuspecting
exporters. Its a double whammy for the exporter
- as he not only looses money to the middleman
as commission but also the consignment. This is
a particularly dangerous kind of fraud as the
loss may run into lakhs of rupees, bankrupting
a running business.
L/C as Investment
Other letter of credit frauds occur when con
artists offer a "letter of credit" or
"bank guarantee" as an investment wherein
the investor is promised huge interest rates on
the order of 100 to 300 percent annually. Such
investment "opportunities" simply do
not exist.
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