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Bogus documents and L/Cs put banks at risk

Under sub-article 14 (a) and article 34 of UCP 600, banks are not obliged to go beyond the documents as they appear on their face nor can they be held responsible for the falsification of the documents presented. If that is the case, does it matter to banks if the documents presented relate to a non-existent cargo?

There are two aspects to this issue. On the one hand are the obligations that banks enter into between each other under the UCP. UCP 600 correctly reflects the position with the articles above. Notwithstanding this, there are very real risks that banks assume vis-à-vis their counterparties and regulators if inadvertently they finance customers who regularly present spurious shipments to them.

Compliance with the UCP is only one side of the risk coin. It is easy for bankers, through blind adherence to the UCP and the exclusion of all else, to ignore the flip side risks of fraud and money laundering. A few current cases highlight this.

Middle East banks

The secondary market in L/Cs in the Middle East is a well-established business through which banks seek to fully exploit their correspondent banking relationships or increase the volume of their trade finance transactions. This sometimes helps those banks that do not have direct access to a wide range of trade finance customers.

A Middle East bank active in this trade was approached by a bank in North Africa to "buy" a set of documents, valued at tens of millions of US dollars, on a 90-day deferred payment basis, which appeared to involve a government buyer in that country. It was only when the bank investigated the transaction through the International Maritime Bureau (IMB) that it discovered the shipment had not taken place as described on the documents and rejected the offer.

This information was passed on to the originating bank in North Africa. Within weeks, a number of other banks were offered the same set of documents. Secondary banks offered these transactions are inherently remote from the customer with little knowledge of the customer's business and the true context under which the transaction was offered to the banks. They are vulnerable.

The easy approach is to take the view that the secondary bank is not concerned with whether the goods exist or not, but simply takes a credit risk on the North African bank. However, there is the practical risk in the event of a fraud that local courts in the North African country may take a different view concerning the contractual obligations under the UCP. This may not be what the UCP intends, but hard-pressed nations have tried to resist paying out tens of millions of dollars if they have not received value in return. It is this reality which may impose upon the prudent Middle East bank a need to make checks to ensure that the shipment was performed. Buyer beware!

An Asian case

A bank in Asia received a substantial L/C (Master L/C) for the shipment of finished garments. In turn, as permitted under the L/C, it split the L/C into many different "back-to-back" sub-L/Cs favouring various subcontractors who were to complete different processes leading to the finished product. In the local market, everyone referred to these L/Cs as "backto- back" with the implied assurance that the risk on the sub-L/Cs was covered under the Master L/C.

Using the sub-L/Cs as collateral, the subcontractors drew funds from various banks in advance of negotiation. What the banks failed to appreciate was that the L/Cs were not back-to-back, and performance under the Master L/C was significantly different from the performance under the sub-L/Cs. The Master L/C and, in many cases, the sub- L/Cs, were not performed.

Furthermore, it turned out that the beneficiaries of the sub-L/Cs, the subcontractors, were all part of the same group as the beneficiary under the Master L/C. Around USD 300 million was lost as a result of this fraud on a large number of these transactions. The fraud was also facilitated by political pressure on the bank managers to ignore the warning signs as the amounts at stake accelerated to unacceptable levels. Checks to verify the shipments would have gone a long way to make a strong case for stopping the financing before the fraud got to a stage where the losses became so severe that it became a major issue for the many local banks embroiled in this relationship and required the intervention of the Central Bank.

Structured trade L/Cs

Another transaction doing the rounds in recent years, and which reportedly has had takers in trade finance markets around the world, is the "structured trade L/C". This is a misnomer. There is nothing "structured" or "trade-related" about the transactions described below.

The other names by which it is known, "financial engineering" or "synthetic L/C" perhaps describe it better, particularly if its intent is similar to the now infamous "synthetic CDOs" which, at least partly, set off the financial crisis in 2007/2008. A "synthetic L/C" is said to occur when trading companies with strong balance sheets lend money to smaller banks and business groups. Instead of being described as a loan, the documentation dresses it up as a deferred payment (typically 365 days) trade finance transaction relating to a shipment of goods.

All parties, including at times the confirming banks, know that there are no underlying goods. In fact, the L/C often calls for presentation of copy documents. Setting up the loan as a trade finance transaction circumvents oversight by regulators into the "loan". Fees earned by the confirming banks are high, encouraging them to ignore the obvious warning signs. Confirming banks are led to believe their sole risk is the credit risk on the opening bank.

The often overlooked fundamental flaw in these schemes is that they are building substantial debt obligations on transactions that have no intrinsic value and that are based on documents that misrepresent the true nature of the transaction. Do you hear familiar echoes of the recent past?

Purists may rightly say that this was not the purpose for which the UCP was designed. There have been cases when on the due date the confirming bank has not been able to collect on its debt. When that happens, it will find itself on its own, with little support from the trader who invited it into the transaction, who will say, correctly, that the banks knew from the outset exactly the kind of transaction they had financed.


Often, banks enter into this type of transaction because it is seen as an easy way to meet hard-to-achieve targets in a tough economic climate - particularly when other banks set the trend. Management in banks need to focus on the true nature of these transactions and provide clear direction to their teams as to the type of transactions acceptable to the bank. Many banks have taken the position that they will not participate in these schemes.

Financing spurious transactions may comply with the terms of the UCP, but for many good reasons it may not be in the bank's interest to become involved. These include vulnerability to fraud, involvement in money laundering schemes, illegal capital flight and reputational risk. What starts off being perceived as a short-term manageable risk can soon escalate in value and risk as the message that this is acceptable business quickly filters through to lower levels in the bank. The bank itself eventually becomes the victim; hence, the need for it to have measures in place to identify and avoid these schemes.

Trade finance in its traditional form is a reliable, solid business, based on goods traded or services provided. The financing of these spurious shipments in the knowledge that the goods do not exist distorts this model and weakens the case, strongly made to regulators and governments, that trade finance is a nonspeculative and inherently safe financial activity. 

L/Cs increasingly subject to political pressures

Political currents have long helped shape the letter of credit market. Politicians are well aware that policies employing L/Cs can be used to boost cross-border trade, force or block geopolitical change as well as to support or protect domestic policy. .......... READ MORE

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ICC has played a crucial role in international trade facilitation over the past century. Some of the most important initiatives in this area ........... read more

BNP Paribas to provide L/C services for US exports to Vietnam

By Mark Ford

9 October 2012

BNP Paribas is to provide letter of credit (L/C) services in support of a major order from Vietnam for US-made telecommunications equipment.

The L/Cs will be provided to help Lockheed Martin Space Systems Company export telecommunications and satellite equipment as well as additional goods and services to Vietnam in an order supported by the Export-Import Bank of the United States (Exim Bank).

Loan approval

Exim Bank recently approved a US$118 million direct loan to the government of Vietnam for the export of the equipment.

This is Exim Bank's first satellite transaction with the government of Vietnam, and the US export credit agency's support is expected to stimulate total export sales of US$215 million.

The order will support approximately 525 full-time equivalent US jobs, according to Lockheed Martin estimates.

Growing demand

The customer is the Hanoi-based Vietnam Post and Telecommunications Group, a state-owned enterprise that hopes to satisfy the growing demand for telecommunications and television services in the region.

As well as providing L/C services, BNP Paribas will serve as the documentation agent for Exim Bank-supported business in this order.

The EBRD and trade finance in Central and Eastern Europe

The European Bank for Reconstruction and Development (EBRD) was established in 1991 in response to major changes in the political and economic climate in Central and Eastern Europe. Today the Bank ...........read more

Issuing banks and B/Ls consigned to order of themselves

Why do some L/C issuing banks require presentation of a B/L consigned to the order of themselves? This was a question I posted in an online group to get some discussion going. I realize that bankers have probably never really thought about the question. Presenting banks, nominated banks, confirming banks, any bank reading another bank's L/C simply accept ...............   


A transfer L/C fraud case

Extracted from DCInsight Vol. 18 No.3 July - September 2012

by King-tak Fung

A bank in Hong Kong issued a transferable L/C to the first beneficiary in Singapore. The L/C was available by negotiation with the transferring bank in Singapore and expired in Singapore on 6 February 2006. It was transferred to the second beneficiary in South Korea. The transferred L/C ..............read more

Responses to catastrophic events under different ICC rules 

Each set of ICC rules addresses something known as force majeure ("FM"). But exactly what is an FM? Loosely defined, it is an event that forces an issuer's/guarantor's business to be interrupted and unexpectedly closed. If an FM is declared, then a bank may or may not have certain obligations depending on its role. For purposes of this article, I will concentrate on the views and practices for banks that have a responsibility to process .......read more

Upheaval in L/C-based commodity markets

Major changes are afoot in the substantially L/C-dependent commodity financing market, as Europe's banks continue to reduce their exposure to this important aspect of global trade. The lack of liquidity caused by the eurozone crisis has forced the same banks to reduce their historically dominant position in this market and curtail speculative commodity trading activities...... read more

The tightening vice on Iran

In April, SWIFT took the unprecedented step of blocking a number of Iranian banks from using its messaging service. The action came as the result of EU's tightening sanctions ................ read more

Trade finance: facing "the five Cs"

Since the 2008/9 crisis, challenges and pressures in the business have only intensified. What I categorize as "The Five Cs" - Capital, Credit, Costs, Competencies and Compliance - have converged to make this the most challenging ....................... read more

Gloomy trade finance outlook for 2012


Recent developments in European financial markets and their impact on global trade finance called for a Market Snapshot that would help the industry and policymaking communities to monitor emanating risks and provide timely input into on-going regulatory and G-20 discussions. The

International Chamber of Commerce (ICC) and the International Monetary Fund (IMF) decided to join forces to conduct this snapshot survey of trade finance conditions worldwide, with the objective to determine the market outlook for the year 2012.

A few findings were striking. This new research based …………read more


New uniform rules near completion

It's some time since readers of DCInsight were informed of the project between ICC and the International Forfaiting Association (IFA) to produce a set of rules for the forfaiting market. That project, after considerable effort from all involved, is .......................READ MORE

Ousted US bank CEO accused of L/C irregularities


The former employers of a bank CEO in the US state of Minnesota have accused their former employee of using letters of credit (L/Cs) to secure personal loans for himself.

Voyager Bank Financial Services (VBFS), the holding company of Voyager Bank, allege that the bank's ............ READ MORE


Ratings will improve state-owned US bank's L/C provision


The Standard & Poor's (S&P) ratings agency has upgraded its ratings for the only state-owned bank in the US.

This means the Bank of North Dakota (BND), which provides financial support for the state's public, agricultural, commercial ........ READ MORE


Vietnamese exporters decline credit insurance to bolster L/C and cash exports


The Vietnamese government is looking for ways to boost foreign trade by providing exporters with more financing options and guaranteeing export payments.

Vietnamese exporters currently sell .......... READ MORE


Iran bars L/Cs for UAE imports


Iranian importers have been barred from opening of letters of credit (L/Cs) for imports from the UAE, according to local media reports.

The semi-official news agency, Mehr, says the L/C ban is due to the UAE's "illogical behaviour."............... read more 


Financial crisis spawns new L/C players

In April 2009, world leaders at the G20 summit in London signed off on a package to mobilize a US$250 billion trade finance package to tackle the severe shortage of trade finance caused by the global financial crisis. The package targeted ........ read more


by Azahari bin Awang Ahmad

17th November 

Economic uncertainty is upon us again, not long after the last credit squeeze crisis that impacted most of the Western world, rich Asian nations and other nearby regions. Lucky for Malaysia, we only suffered on the periphery of the crisis and Click to add text, images, and other content ........... read more

Glossary 'B' 

Glossary 'B' for trade terminologies now launched..........read more


 Thailand's floods prompt L/C amendment calls

Thailand's recent floods have prompted traders to call for amendments to letters of credit (L/Cs) pertaining to goods stranded in some of the country's ports.

Thai exporters and importers also want the Port Authority of Thailand, ..... READ MORE


Pakistan mulls L/Cs to unblock energy finances
L/Cs return to Libya, retreat from Syria
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More arrests in alleged Iranian L/C fraud
Taiwan to recognise Chinese L/Cs and bank guarantees as collateral

Taiwan's Financial Supervisory Commission (FSC) has said that it will soon accept letters of credit (L/Cs) and bank guarantees issued by mainland Chinese banks as collateral.

The financial instruments may be presented as ............... READ MORE


Drafts: the date of issue in bills of exchange
Middle East, North Africa unrest roils L/C markets
The dangers for trade finance under Basel III

Excerpts from the 2011 Global Survey



Although sanctions and compliance are governmental requirements that banks can do nothing about, there are questions that arise vis-à-vis banks and their customers - the buyers and sellers.

...........read more

Post-credit crunch shift to bank guarantees/L/Cs sustained


Businesses in the Middle East and North Africa are continuing to shy away from open account trading according to Standard Chartered's managing director .... READ MORE


Chinese firms use bank guarantees and L/Cs to obtain credit overseas

14 July 2011By Mark Ford

Chinese firms are using bank guarantees and letters of credit (L/Cs) to obtain credit for their subsidiaries from overseas banks...... read more


Malaysian banks reluctant to give out green tech loans


Suretyship: guarantee or indemnity

By Roger Fayers

"What's in a name?" Shakespeare wrote, "That which we call a rose by any other name would smell as sweet (1), but he surely didn't have in mind English law on suretyship. This, as recently described by the judge ......... read more


Pakistan releases funds to make power L/Cs more available

29 June 2011

The government of Pakistan has released funds of around US$128 million to make letters of credit (L/Cs) more available for the country's largest vehicle fuel retailer.

The move should help .......................... READ MORE


Bank guarantees and L/Cs contribute to Chinese credit growth concerns

Bank guarantees and letters of credit (L/Cs) are partly responsible for a big increase in off-balance sheet loans reported by Chinese banks. ...


South Korea presses Vietnam for new L/C arrangements


Talks between Indian and Pakistani officials could lead the way to improved letter of credit (L/C) and bank guarantee availability for bilateral trades between the two countries.

The prospects for such improvements ........... READ MORE


Insurance industry L/Cs under pressure from captive trusts


Insurance industry L/Cs under pressure from captive trusts 

Captive insurance companies should consider using captive trusts instead of letters of credit (L/Cs) as collateral according to a vice president at Wells Fargo. ....... READ MORE



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Click to add text, images, and other content

UCP 600 and Banco Santander


DCInsight Vol. 1726 No.2 April - June 2011

by Jim Barnes

A New York court recently held that the Banco Santander case was effectively undone by the revisions introduced in UCP 600. The case, Fortis Bank (Nederland) N.V. v. Abu Dhabi Islamic Bank1, is of interest to L/C bankers ...... read more


China ends death penalty for L/C frauds
Asian Development Bank and Australia to guarantee L/Cs to developing Asian economies

Australia's export credit agency has signed a risk-sharing agreement with the Asian Development Bank (ADB) to guarantee letters of credit (L/Cs) for exports of Australian goods into certain Asian countries.

The agreement is made under the ADB's Trade Finance Programme (TFP) lick to add text, images, and other content ....... read more

A recent court case and URDG in the Arab world


Suretyship: guarantee or indemnity

By Roger Fayers

"What's in a name?" Shakespeare wrote, "That which we call a rose by any other name would smell as sweet (1), but he surely didn't have in mind English law on suretyship. This, as recently described by the judge ......... read more



Click to add text, images, and other content


Click to add text, images, and other content


Click to add text, images, and other content

The reality of the strict compliance rule

"You bankers are technicians. Your job is to compare the documents with thedocumentary credit, the UCP and the documents with themselves, none ofwhich requires any discretion on your part!" ............ read more