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.

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.