Swindlers loan with your LC?

Hi Everyone,

                     I am a newbee here! could someone advice me on LC.

Could fraudsters use your non-operative or operative LC to borrow a loan or use it as a guarantee against a loan from the bank?

Thanks for your help in advance  

Thanks Egernia for your reply. I have a friend told me that fraudsters in the past have use his LC to borrow money and then shown no intention to supply product. Consequently tied down his LC for 90 days and he ended up with an expensive bank fee. 

 

 

Aussie John I have never heard of that but it certainly does not mean that it cannot happen.

Perhaps someone else will give you a reply also and let you know how likely they think it is that you could get scammed here.

Quoting from [Aussie John]:

Hi Everyone,

                     I am a newbee here! could someone advice me on LC.

 

Could fraudsters use your non-operative or operative LC to borrow a loan or use it as a guarantee against a loan from the bank?

 

 

 

 

 

 

 

 

Thanks for your help in advance  

 

 

 

 

 

If the beneficiary is intent on fraud, they can dream up of various methods of swindling you. The method I see here is only to have access to cheap funds, because most countries have lower rates of interest for export credit.

So your funds may be tied up for the period of validity of the L/C.

But, unless the drawer of the L/C has been extremely foolish by not drawing up an iron clad L/C where performance is guaranteed, I do not see the beneficiary just drawing the funds and disappearing into thin air.

The moral of the story seems to be to know your vendor.

The old maxim of "Buyer Beware" always stands good.

Dusant - Best Biz Intl - Mainland China

The swindle has nothing to do with you.  The swindle is between the supplier and his bank.  Besides if you know what your doing with L/C's and the terms of L/C's this isnt going to tie you down.  For instance:

You open an L/C to a supplier that says they have stock on hand of what you need.  Why are you going to give them 90 days to submitt the documents for negotiation?  The prudent thing to do is make the expiry date only 30 days.  Besides this no bank is going to loan money on an L/C for the supplier that has no credit background with that bank.  It just would not be sound banking procedure for the suppliers bank to do so.

On the manufacturing side this is a little different as the clauses within the framework of the L/C can be totally different.

Ranger

Quoting from [Aussie John]:

Hi Everyone,

                     I am a newbee here! could someone advice me on LC.

 

Could fraudsters use your non-operative or operative LC to borrow a loan or use it as a guarantee against a loan from the bank?

 

 

 

 

 

 

 

 

Thanks for your help in advance  

 

 

 

 

 

I think the scenario my friend had experienced is that he and dodgy seller both signed the contract; my friend opened the LC, however the dodgy seller probably didn’t have the goods in procession, and decided not go through with the 2%PB. So my friend ended up with his money tied up plus a large bank fee.

I don’t know it’s all B.S. but during a cup of tea, he told me the monthly value in his contract exceed USD130 million!  Any idea of the LC bank fee of this amount?   Thanks

You keep giving me more of the puzzle with every post.  It really now depends on the type of L/C that was opened and if that L/C only became operative upon the supplier putting up the 2%PB.  Your friend should never have been stuck with any kind of large bank fee if the supplier had not opened the PB.  If the L/C was a revolving L/C for 130 million monthly most likely the total cost to open it,  once becoming operational on the PB the fee could be between $325K and  $650K  of course thats only the opening fee.  There are fee's everytime the buyers bank reviews documents and sends payments.

The problem here on the part of the supplier would be in coming up with the PB  figuring 12 months times 130 million = a $31 million dollar PB or a PB for the individual revolving amount of the L/C which would be $2.6 million dollars.

In any case, if the terms of the L/C were provisional on a PB from the supplier.  The bank fee would have been minimal ususally in the amount of  1K or 2K based on that size of L/C due to the fact of the Swift communications that went on between the Issuing Bank , Confirming Bank, and the Advising Bank.  If you friend paid more than that then he just has a bad bank that charges exhorbinant fee's for doing nothing.  

Ranger

Hi Ranger,

                   Thank you for your answers. If the seller put up the 2.6 million PB against $325K and $650K opening fee of the operational LC, I should think my friend would have no issues as he’s clearly in front. 

As you said no bank is going to loan money on an L/C for the supplier that has no credit background with that bank, and it’s just would not be sound banking procedure for the supplier’s bank to do so. Just say if the seller has good credit history with his bank, do you think the seller would still be able to get a loan from his bank against the operational LC?  

What are you thoughts if the seller got hold of my friend’s 130 Millions operational LC and put in some form of short term money market (30-60 days) to gain some interest and not intend to supply the goods? Do you think this could happen?

Thanks in advance,

Aussie John

Quoting from [Aussie John]:

Hi Everyone,

                     I am a newbee here! could someone advice me on LC.

 

Could fraudsters use your non-operative or operative LC to borrow a loan or use it as a guarantee against a loan from the bank?

 

 

 

 

 

 

 

 

Thanks for your help in advance  

 

 

 

 

 

Anyone cares to comment or advice?