FRAUD

Mr. Old Man exchanging views with Armagedo and Frammi on a fraud case on www.letterofcreditforum.com

FROM MR. OLD MAN

Dear members,

As a frequent writer for banking magazines in Vietnam, I sometimes receive from local banks queries on international payment operations. Here below is one of the queries and my opinion that I wish to share with you and look forward to receiving your comments.

At the request and for account of XYZ Company (Applicant) Bank I issued a letter of credit for USD xxx,xxx.xx in favor of ABC Company (Beneficiary). The goods as described in the credit was scrap steel to be shipped in containers. The credit was advised through Bank N with open confirmation allowed, i.e. confirmation may be added by Bank N at its own option..

As the cargo had arrived at the port before the documents, at the request of XYZ Company, Bank I issued a shipping guarantee in favor of the shipping company to enable XYZ Company to take delivery of the cargo without production of the original bill of lading.

One day later XYZ Company returned the original shipping guarantee to Bank I and informed Bank I in writing that there was a fraud involved regarding the shipment under the credit, that is to say, goods of no value were shipped instead of those as stipulated in the credit. Minutes of inspection signed by the Customs and the applicant showed that the cargoes contained in ten containers were all stones instead of scrap steel as expected.

Bank I asked me what actions they should taken to help XYZ Company (and also help itself as financing bank) avoid the risk of loss.

My advice given to Bank I was as follows:

Bank I should immediately send to Bank N a swift message informing of the fact, requesting Bank N not to honor or negotiate any documents that are expected to be presented to Bank N shortly and asking Bank N to confirm under authenticated swift message to Bank I its action regarding Bank I’s request. At the same time, XYZ Company should inform ABC Company of the same and threaten to take legal action against ABC Company for its fraud crime. My advice was given on assumption and speculation that ABC Company might not have presented the documents to Bank N and/or Bank N might not have negotiated the documents presented by ABC Company. Such situational action could be considered a warning to Bank N and ABC Company as well.

Bank I did as what I advised. In fact, the thing in question is in progress. So far one week has elapsed.

Bank N has kept silent to the information and request given by Bank I. XYZ Company and Bank I begin to worry. I calm down them by saying “Don’t worry. Things will be OK”. As said the question is in progress.

The final result may be contrary to what Bank I and XYZ Company have expected. I will tell you the final result when I have it. But before you have it I wish to listen to your comments on the question:

What would you do if you were Bank I ? What would you do if you were Bank N in case (i) having not yet negotiated the documents and (ii) having negotiated the documents already ? What would you do if you were XYZ Company ?What would you do if you were ABC Company ? Other solutions for the question are welcomed.

Best regards,
Nguyen Huu Duc

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COMMENT FROM ARMAGEDO
IMHO, no alternatives except discrepancies to be found

Hi!

Some point were discusse here
http://letterofcreditforum.com/node/159

Yes, You are right – this is 100%, transparent fraud.

But:
It is clearly stated
UCP 600 – Article 5 Documents v. Goods, Services or Performance
Banks deal with documents and not with goods, services or performance to which the documents may relate.
Also obligations are fully described for the issuing bank as well as for nominated/confiring/advising in appropriate provisions of UCP.

There is no chance for the banks to make step away of DOCUMENTARY nature and terms of LC.

If presentation will be compliant "on its face" then banks will be forced to fulfill their IRREVOCABLE obligations to honour or negotiate.

Otherwise, for what UCP rules for DOCUMENTARY credits are?

And who will trust the bank who doesn't fulfill its IRREVOCABLE obligations?

As from my side the only is to pray for discrepancies in docs presented.

For the Buyer it is obligatory not to spent time and to claim by means of court against Seller and shipping company in reg fraud discovered.

Good luck.

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COMMENT FROM FRAMMI

Fraud!!! No question about that!

But being a fraud also implies there is the possibility of an injunction against the payment. Please note: Only if it is – without a doubt – an absolute and unbeatable fraud!!!!! Not if the quality is just inferior.

You gave a good advice!

As an applicant or may be even also as an issuing bank, I would search for an injunction. From my German point of view, the injunction should be directed against the beneficiary and should prohibit the beneficiary to make a claim under the credit. I know most parties try to get an injunction against the issuing bank, but somehow I learned that banks will often raise objections against injunctions against them.

The next thing would be to enter legal proceedings against the beneficiary because of
– fraud
– misconduct under the contract
– wishful, wrong customs declarations

Of course the easier way would be to find discrepancies.

But if someone has that much criminal energy to fill containers with stones and send them for good money to someone else, you can be dead certain that he will have enough criminal energy to present docs under the credit – and possibly be clever enough to present docs without discrepancies.
As a presenting bank being informed of the fraud in advance and the fraud being proved by the minutes of the customs authorities, I would – if possible – refuse as much support as I legally can and get all accounts of the beneficiary cancelled. You know – today he betrays the applicant and his bank – tomorrow me!

However there is also the faint possibility that the goods were in fact correctly shipped by the applicant but replaced by stones lateron by someony else. Nevertheless, I would be very reluctant and cautious.

As a criminal beneficiary, I would have had presented the docs before the goods arrived at destination! If
I would have severly failed to present docs in time, I would try to disappear – the further the better.
As a beneficiary not having anythingto do with the replacement of the goods, I would search to minimize my eventual loss and defend myself against the injunction and the legal proceedings as they severly threaten the future of my company. And I would get someone to take a close look at all my staff and the staff of my partners involved as there is quite a chance the fraud was then committed with the help or even by one of them!

To say more, we would have to know the contract and the delivery terms included. Was there a pre-shipment inspection? What is the beneficiary's point of view?

-Each mountain ends as a small stone-

Best regards
Frammi

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FROM MR. OLD MAN

Thanks a lot, Armagedo and Frammi

Dear Armagedo and Frammi,

Thank you very much. I totally share with your views on fraud cases.

Regarding the case in question the latest news I have received from Bank I is as follows:
Keeping silent to Bank I 's stop-negotiation request, Bank N has forwarded the docu
ments to Bank I for payment. The covering schedule which is dated 03 days later than the date of Bank I's request does not certify if Bank N has negotiated or not neither indicate if the documents are complying or not.
Bank I has found the documents to contain many valid discrepancies. It is contacting the applicant for their final decision.

Bank I told me that early this morning it received a phone call from Bank N's branch located in the country of Bank I informing that Bank N will request Bank I to return the documents. Bank I is waiting for Bank N 's instruction to return the documents.

I guess Bank N begin to feel uncomfortable when presenting the documents which had been informed in advance of the fraud possibility.

Frammi, it is true that the mountain has ended as a small stone.

Once again, thanks a lot, Armagedo and Frammi.

Best regards,
Nguyen Huu Duc

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COMMENT FROM ARMAGEDO

Now they have a chance to avoid payment

Dear Nguyen Huu Duc !

As from my point of view.

I guess Bank N begin to feel uncomfortable when presenting the documents which had been informed in advance of the fraud possibility.

It's not a question how the nominated bank feels.
He has no other choice then to send the docs.

I suppose that he also has checked the docs, found them discrepant, beared in his mind that the fraud is discovered.

He has applied to Beneficiary on how to proceed and, IMHO, received the order to send the docs to issuing bank hoping that the issuing bank will fail.

But to secure bank's interest he, IMHO, has used UCP 600 Article 12 (a) taking no obligations to honour or negotiate under such circomstances.

So, now, IMHO, it is turn of the issuing bank to be dilatory as much as he can under UCP.
Firs of all, he has separate 5 working banking days to check the docs and to take a decision – Article 14 (b).

Then issuing bank to use Article 16 (c)(iii)(c) to return docs to nominated bank.
Mailing with the lowest rate will give lowest speed and I suppose it will take 1-2 days nominated bank to receive docs.
Then bureucratic procedures in the bank, applying to beneficiary, which take at least 1-2 days.
So we'll have 7-8 days which means 9-10 working business days from the moment of receipt of the docs at issuing bank counters and to postpone possible discrepant docs substitution and new, but compliant, presentation.
Then all is depending on terms of LC, period for presentation, expiry of credit etc…

But, IMHO, in any case applicant should to start court process against beneficiary and shipping company.
Thus there is chance that the court will take a decision to stop any operations under this transactions and LC, which will be additional preventive action to avoid payment under fraud.
And no pity to nominated bank and beneficiary.

Let now this issue to be their baby.

Good luck.

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COMMENT FROM MR. OLD MAN

100 % Fraud

Dear Armagedo,

Thanks a lot.

So far Bank I has received Bank N’s swift message requesting the return of the documents though Bank I has not yet sent any notice of refusal to Bank N.

To avoid the probability that the beneficiary may have time to replace and re-present the corrected documents, Bank I is making full use of the 5 banking day it has under UCP to delay the giving of its notice of refusing and returning the documents till the deadline. The applicant has been advised to prepare evidence to take legal action against the beneficiary (and/or even the shipping company if necessary) in case the corrected documents are re-presented though in reality, the probability for the applicant to replace the documents is very small. I think it is not difficult for the applicant to obtain a stop-payment order from the local court.

Regarding your view, one thing I wish to note that while the documents are not yet returned, the beneficiary may replace the presented documents with the correct ones provided that such a presentation is within the stipulated presentation period and within the credit validity.

That I guessed Bank N began to feel uncomfortable when presenting the documents which had been informed of the fraud possibility in advance was based on the followings:

Bank N requested the return of the documents while having not yet received Bank I’s notice of refusal.
Bank N may be aware the fraud is true and may not want to get involved in such a fraud which may affect its reputation.

Bank N which is one of the biggest banks in US is trying to keep a good relationship with Bank I which has maintained a/c with and effected hundreds of payment transactions a day via Bank N.

Anyway, thanks again for your nice and clear explanation.

Best regards,
Nguyen Huu Duc …