Beware of the LC Scam - Part 2

The Scam

A scammer is always careful to stipulate that a Letter of Credit must be irrevocable, negotiable, transferable, assignable, preferably revolving, and that he be named the Beneficiary. This is so that if by any chance the victim actually does purchase a legitimate LC, it can be easily handed over to the swindler with no recourse. Once that is accomplished, the swindler has every right to present himself to the issuing bank in order to obtain a Draft; however, in most instances the swindler insists that the victim obtain and hand over the Draft as well.


Supposedly, the LC will then be entered into a Trade Program (HIGH-YIELD INVESTMENT PROGRAM or HYIP) where it will be used to generate impossibly huge profits in an impossibly short time ("impossible" because the entire planet would go broke if their claims were true, or we'd all be wheeling around wheelbarrows full of cash to buy a loaf of bread). The victim is supposed to receive around 50% of the profits, and the Trader receives 50%. From this they are each to pay their respective INTERMEDIARIES.

Forfaiting: While a Letter of Credit may be forfaited (also known as export factoring, the international trade equivalent of factoring), that is not a procedure to be taken up by the inexperienced. Without an intimate knowledge of trade finance, trade law, international politics and economics, and a career-based understanding of banks and banking, you can quickly find yourself up the creek without a paddle.

Fraudsters truly enjoy using the term "forfaiting." I believe that this is because, especially when the native language of their intended mark is English, the term "factoring" is too readily understood. Nothing appeals more to the psyche than an exotic term, and swindlers make full use of this all too human trait.

The scam is that one can purchase Letters of Credit either from banks or from Beneficiaries for far less than the face value (value at maturity), then "forfait" them at enormous profit. Just how this is done is never really explained and any attempts at getting an explanation are artfully turned aside or simply fabricated, or the SECONDARY MARKET sale is inserted into the scam.

The usual swindler approach involves persuading the target that a Letter of Credit can be purchased at enormous discount in exchange for the victim's funds, and that a few weeks or months later this same financial instrument will be worth hundreds of thousands more or can be sold for hundreds of thousands more. Sometimes the numbers slip into the hundreds of millions.

Another form of patter would have you believe that you can purchase a Letter of Credit at Top-euro Bank for only 25 or 45% of the full value, immediately walk across the street to Prime-euro Bank and sell it for full value, then turn around and do the same thing the following day. The reason the swindler can do this is by special contract or dispensation with Top-euro, and you can be a lucky participant because the swindler likes you so much.

A favored ploy is to insert the bogus term CUTTING HOUSE into the structure of the scam. Once again, this mixes a straight out Letter of Credit scam with the High-Yield Investment scam. In this scenario, the victim is told that LC's are BANK GUARANTEES, aka BG's or PBG's (Prime Bank Guarantees). According to the swindler, Bank Guarantees are printed out in bulk by the Cutting House, an alleged establishment much like a printing company that spits out financial instruments like the Treasury prints money, and does this on demand for Top or Prime European banks such as the one with which the so-called TRADER has a contract.

If the Trader has a contract with or is "connected" to the so-called Cutting House, then the victim is made to feel he has really hit the jackpot.

The Trader needs your funds to purchase the bulk LC's/BG's on a FUNDS-FIRST basis so they can be SEASONED overnight (seasoning actually takes at least a year), then sold to the Secondary Market the following day. The much-used statement is that this can be accomplished 40 times a year, except for the period between November 15th and January 15th of the following year. Why? Because supposedly all trading comes to a halt during that time.

Another scam is to purport to be a PROVIDER of Letters of Credit. The phony Provider has a special in with Top or Prime banks and can obtain Letters of Credit on the victim's behalf. Most of those who fall for this are victims who are not creditworthy enough to apply for an LC through regular channels, or people who have no working knowledge as to how LC's are really used and therefore believe that there is some magic way to turn them into majestic profits. In this type of scam the value of the LC is almost always in the 100's of millions of dollars.

There are yet more scams involving Letters of Credit, some of which are particular to Standbys and some of which involve fraud committed by financial institutions, exporters, importers, and any entity that has access to Letters of Credit in all their formats. For every type of Letter of Credit, there is an attending scam.