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 FAIDA
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:
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
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
======== end of e-mail from fraudster
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.
- Newsletter on Business Opportunties from India and Abroad
Vol: 3, Issue 41
February 6' 2003