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 Mandatory" 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.
Where Does the Fraud Take Place?
This sort of thing happens infrequently and again won't raise
too many eyebrows. However, The Bank is left holding the bag and
will not know it was defrauded for another couple of weeks. Mr.
Natal is now wealthier by $8,580,000. He will add another $7.8
million dollars as The Bank's collateral will prove
worthless, for a total heist of $16,380,000.00.
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 this scenario
could happen. 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.
Mr Ross, is a world expert in Bank Fraud and Letters of Credit.
He offers Seminars on how to author
Letters of Credit to major corporations, thusly saving monies for
the document. Mr. Ross, couples a plurality expertise within,
Int'l Cargo Insurance and Monetary exchanges.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.