Letter Of Credit Scam In The Form Of MT710

Letter Of Credit Scam In The Form Of MT710

By Huu Duc Nguyen

(https://www.tradeservicesupdate.com/editor?editor=editor_duc)

The letter of credit (L/C) is widely used in international trade as a mean of payment and financing. Although considered a secure payment method as the exporter will be paid upon presentation of documents complying with the terms and conditions of the L/C, it is also one of the preferred instruments used by scammers. Recently some inexperienced exporters have been tricked into exporting cashew kernels under Ls/C advised in the form of MT710.

What is MT710?

MT710 is a special type of SWIFT message sent by an advising bank, which has received an L/C from an issuing bank or a non-bank issuer, to the bank advising the beneficiary (exporter) or another advising bank. It is used to advise the beneficiary of the terms and conditions of an L/C.

According to an ICC Opinion that addresses an L/C issued by a non-bank entity, it does not “violate” the UCP for a non-bank to issue an L/C subject to the UCP even though such issuance is not contemplated in the rules. The UCP does not specifically provide for bank advice of non-bank issued Ls/C. Such an advice should accurately identify the issuer and indicate the advising bank’s limited role. If the form of advice refers to the “issuer” as “issuing bank” or otherwise gives the impression that it is a bank, it is recommended that the advice affirmatively disclose the non-bank status of the issuer to correct any mistaken impression caused by such reference.

Also, according to the ICC Opinion, where the manner of issuance misleads the beneficiary into believing that the issuer is a bank, the advising bank may expose itself to liability. Ultimately, however, the decision as to whether to accept the risks associated with a non-bank issuance is up to the beneficiary.

A non-bank entity which issues an L/C subject to the UCP also has the same obligations as the issuing bank, that is: To pay when the documents presented comply with the terms and conditions of the L/C. However, the beneficiary assumes the risks of the creditworthiness of the non-bank issuer unless it is offset by obtaining confirmation. Therefore, the beneficiary needs to consider whether he is willing to accept an L/C issued by a non-bank entity.

Scam tricks using MT710

Scam tricks using MT710s are very sophisticated. The following is a typical case:

• A scammer approached a cashew processing company and  signed  a contract to import cashew kernels at prices higher than market prices, payment by letter of credit at sight.
• A letter of credit was advised in the form of MT710 and relayed through several banks before it is advised to the beneficiary.
• Required documents included 3/3 straight bills of lading.

After receiving the L/C notification from the advising bank, the beneficiary made shipment and presented the documents to the advising bank, which also acted as the presenting bank, for forwarding to the issuer for payment. At that time the beneficiary was shocked to learn that the L/C was not issued by a bank but a company in Zambia. However, there was no other way but to send the documents to the issuer at the address stated in the L/C with the hope that payment would be made.

However, after the expected time no payment was received, and the presenting bank tried to contact the issuer but was unable to make contact, while the shipping company had already delivered the goods to the consignee named on the bills of lading.

The advising bank tried to contact the involved banks but received no reply or was replied that as stated at Field 49H (Special Payment Conditions) of the MT710, i.e., that they sent the MT710 against an MT710 they had received from Bank x under their reference xxx without any risk and responsibility on their part.

The L/C appeared to be fake.

Another case like the above, but the issuer indicated at Field 52a of MT710 was a bank. The MT710 was also relayed through several banks before it was advised to the beneficiary. After making shipment, the beneficiary presented the documents to the advising bank, which also acted as the presenting bank, for forwarding to the issuing bank at the address stated in the L/C for payment. But no payment was received, and the presenting bank contacted the issuing bank but failed as the issuing bank’s SWIFT code stated in the L/C did not exist, and the issuing bank named in the L/C was not real.

The L/C appeared to be fake.

Measures to be taken to avoid risks related to MT710

It is recognized that inexperienced exporters, especially small and medium enterprises, are unable to distinguish the difference between MT700 and MT710 messages and not able to identify and assess the risks associated with MT710 while some banks would not act in accordance with the ICC Opinion when advising Ls/C in the form of MT710.

Advice for exporters:

• Always perform KYC and assess the credit worthiness and financial standing of the importing partner through banks or other channels.
• Insist on an L/C issued by a reputable bank in the form of MT700. In case the issuing bank is domiciled in a potentially risky market and has poor financial status, insist that the L/C be confirmed by a reputable bank.
• Where the L/C is advised in the form of MT710, check Field 52a or 50B to determine whether it is issued by a bank or a non-bank entity. Do not accept an L/C issued by a non-bank entity unless it is confirmed by a reputable bank.
• Check all terms and conditions to ensure that they can be complied with and ensure that there are no conditions that make the payment dependent on payment from the applicant.
• Do not accept an L/C that requires presentation of straight bills of lading.
• Beware of an L/C advised or relayed through several banks.

Advice for advising bank:

• Take reasonable care to verify the authenticity of the MT710, especially those advised or relayed through several banks. In case of doubt of the authenticity of MT710, refuse to advise it to the beneficiary or another advising bank.
• Check Field 52a or 50B to determine if the L/C is issued by a bank or a non-bank entity. When it is issued by a non-bank entity, advise the same to the beneficiary so that the beneficiary can consider whether to accept it or not.
• Where MT710 indicates that the issuer is a bank, perform KYC on the issuing bank to determine if it is real and existing.