Frauds - Extracting Payment

Victims are usually surprised and even outraged when they discover that the international banking system provided absolutely no protection against payments made on the basis of fraudulent documents. They fail to understand the rules of international payments systems and the division of responsibility between themselves and the banking system.

The common commodity fraud utilises the normal international trading practice of payment via irrevocable letter of credit. The buyer first arranges for his bank to issue a letter of credit. This is a legal undertaking by the bank, not the buyer, to make payment when certain specified documentation is provided which "proves" the product exists and is in transit to the buyer or at some agreed location - documents the fraudster of course intends to forge. Note that it is the bank which gives the undertaking, albeit at the buyer's expense. The letter of credit is also irrevocable - so the buyer is now entirely in the hands of his bank and the seller. Any alteration to the terms of a letter of credit must be agreed by both parties, so the buyer is powerless even if he becomes suspicious. The crucial point is that banks deal solely in documents, not commodities. They are protected by international banking rules (the Uniform Customs and Practice for Documentary Credits) which stipulate that a bank must honour a letter of credit if the specified documents are presented and are correct on their face. They have neither obligation nor incentive to question the documents; only that they apparently accord with those specified and there is nothing which suggests forgery. In point of fact banks have more incentive to detect forged currency notes or cheques, where they stand the loss themselves.

It is up to the buyer to make independent checks. For example, in the case of the USD 3.8 Million sugar fraud, it would have been simple to establish with Lloyds Register of Shipping that the m/v Giovanna was nowhere near the Brazilian port of Santos in July 1991. It had been renamed the m/v Styliani in 1983 and broken up for scrap in Pakistan in 1984.