Bank Fraud Using Letters of Credit:
An Expert's Perspective

The Setup:

It begins by Mr. Natal walking into TheBank and requesting to open an account for his company that's just opened a new office in town. With his bank documents, he deposits funds for several million dollars. Notably, this gets the attention of the higher ups at TheBank, and he's welcomed with open arms.

Somewhere down the road, Mr. Natal makes an appointment with the Senior Commercial officer to secure some financial assistance. Mr. Natal elucidates that his company has entered into agreement with a machinery supplier in the Ukraine for a multi line packaging machine. This machine is quoted at $7.8 million US dollars. Mr. Natal wants to open a letter of credit to secure the purchase.

Senior commercial officer show signs of resistance in view of the couple of million in their account, and yet needing another $5.8 million. Mr. Natal informs the banker that they must float the original deposit of two million for every day obligations and operations and would, therefore, need to borrow the $7.8 million from TheBank. To ease the troublesome thinking of the banker, Mr. Natal offers to deposit equity shares of Stock certificates equal to the $7.8 million necessary to open the letter of credit for his machinery seller. The senior commercial officer sees little exposure from a liability premise, in that they would hold the equivalent of $7.8 million in marketable securities along with a signed power of attorney, if the bank needs to convert the equities to cash, from Mr. Natal.

With those thoughts in mind, TheBank opens the letter of credit (LC), per the terms Instructed by the buyer, Mr. Natal, with customary inclusion in the LC stipulating the usual formats for invoices, descriptions, shipping dates, ocean carriers, insurance, etc. Included in the LC is the name(s) of individuals permitted to respond to LC queries for amendments and negotiations. Seller's option to appoint "Power of Mandatary" is notwithstanding, even though a principal's name was excluded from the LC, thusly enabling another individual to trigger events in the letter of credit - with the disclosure that any alterations in those names must be dignified by a legal document appointing another party to negotiations. As a precaution, senior commercial officer mandates that TheBank be named as beneficiary on the insurance policy. This mandate, however, is met with vigorous resistance by Mr. Natal, who threatens to quash the whole deal if that remains part of the process. Senior commercial officer relents and permits Mr. Natal to be the named beneficiary to the cargo insurance.

Done Deal!!!

The Fraud:

Bear in mind, almost without exception, all LC's are designated "Irrevocable." This is what will happen down the road with this LC.

• TheBank will front the actual cash by opening the LC, and naming the machinery manufacturer as beneficiary to the LC.
• Mr. Natal instructs TheBank that the LC is to be "Confirmed" via the correspondent banks upon receipt from the packaging manufacturer that the order is complete and ready for shipment.
• The actual money is moved away from TheBank and sent on its way via two correspondent banks to the beneficiary bank. That simply means that the credit is now confirmed.

  . . .All this happens in a matter of days or even faster, depending on banking traffic. The preceding is a typical, every day example of how banks work through LOC's and they're negotiated. In the above case, however, this is what actually happens assuming no discrepancies were notable, (which is rare too).

• Mr. Natal closes his account at TheBank and withdraws his two million dollars, which were available for day-to-day operations.
• Next, the machinery manufacturer negotiates the LC and gets paid for the machine when it's delivered to the freight forwarders holding area, readying for loading aboard a vessel. At that point, the machinery guy gets his $7.8 million.
• Next, the longshoremen load the machine aboard the vessel amongst other containers. Only when on board, another container bumps Mr. Natal's container, putting it in the drink.

. . .Under maritime law, COGSA (Carriage of Goods by Sea Act), the title of ownership transfers �Once over the ships Rail� meaning the cargo is legally owned by Mr. Natal.

• As it is within his rights, Mr. Natal files for indemnification from the insurance carrier for the total loss of his packaging machine. It is safe to assume that the machinery manufacturer will dispatch one of their engineering experts to verify that the machine, now in corrosive stages, is a total loss beyond restoration.
• Insurance Carrier puts up $7.8 million plus customary 10% or $780,000.00 on top of the $7.8 million for the machine as customary on Certificates of Insurance.
• Mr. Natal does not have his machine, however collects the insurance settlement of $7.8 million plus the 10% of $780,000, for a total of 8,580,000.00.

Can you put the pieces together? What happened to the stock certificates? Were the machinery buyer and seller in collusion from the beginning? What activities will be funded from this heist? How could TheBank have avoided this fraud?

As incredible as it may be, the fraud is subtle and more sophisticated than you can imagine. The potential for re-enactment of this same scenario has happened and could repeat itself. It can be avoided by better training procedures and more scrupulous oversight by bankers.

Authors Footnote:
It is not the intention of this author to lecture Banks and/or the federal security forces on how to do their job, or to expose a training session for terrorist organizations. It is doubtful the C.I.A., F.B.I., Homeland Security or any other network, including finCEN, could spot the fraud inherent. The sole purpose is to enlighten, just how easy it is to commit fraud in today's financial community.

Robert Erwin Ross is an Expert Witness in the fields of Investment Securities and Bank Fraud / Letters of Credit.

See Mr. Ross' Profile on Experts.com.

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