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Zoey, JD
Zoey, JD, Attorney
Category: Legal
Satisfied Customers: 16801
Experience:  Active member of the NYS bar since 1989
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Standby letter of credit scams

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My question and criteria for answering


This question is exclusively intended for a lawyer or financial expert with extensive knowledge of and experience with financial banking instruments. My main question is after you have carefully studied the following description of a possible transaction, is it a scam and exactly what makes you so sure?


 


Deal structure


I want to make a loan offer to a potential client (= borrower). I submitted my term sheet including a description of the collateral to company X who deals in bank financial instruments (= type of broker).


 


Company X tells me they are RWA to fund it on the basis of a SBLC fully cash thru their support US bank. In order for them to commit I am required to send them my letter of intent in my company letter head and return it for study and due approval. They will then issue proof of funds and its verifications will be done using normal banking confirmation procedures (MT760?), to serve as letter of credibility for me to forward to my client.


 


The cost for the assets cash blocking is €100,000 and for the account of the beneficiary name of the issuance. It has to be paid within 48 hours after the borrower has verified by MT760 that I have the capacity to fund the deal.


 


Company X tells me if the loan funding is awarded to me, the funds cash assets will be blocked in my clients projects beneficiary details and I will have the comfort of a signed contract for the project with my client who will commit security directly to me. In my contract with the borrower I intend to stipulate that if the confirmation process is positive, he will be bound to take the loan. Therefore in principle, this deal should be considered covered for 100%.


 


Within 72 hours after the borrower has verified my capacity to fund, the money can be made available to him.


 


My own reflections


It seems to me that the economic rationale for this transaction is present because I have a potential client who is willing to give collateral and company X seems to have an investor who agrees with the term sheet and is willing to invest. Company X is also offering to perform thru ABA to SWIFTNET via Intermediary Bank and not the IGBS system.


 


I anticipate that if this is a scam, it must come in the form of one or more stipulations in for example the MT760 which make it impossible to collect the cash needed for the loan. Or the bank issuing the MT760 is not credible. For me to avoid being scammed in either way I intend to work with a very seasoned lawyer/financial expert. Better yet this expert should be willing to participate together with me in the "risk" of funding the cost of issuing the blocked assets. However, at this moment I only want to establish whether I am missing something important and obvious that should tell me company X offer is a scam.


 


Other related questions



  1. What are your key questions before you take a position about whether the transaction I describe is a scam?

  2. A point that is unclear for me is if company X offer is legitimate, am I expected to take the SBLC they arranged to my local bank to get a line of credit against it?

  3. Why would the lender behind the SBLC allow the borrower to commit the collateral to me?

  4. Which law firms or type of financial experts worldwide would likely be willing to risk taking on the cost of this transaction together with me and accept to be paid only if the borrower accepts the loan? I need a list of websites.



Regards

Submitted: 1 year ago.
Category: Legal
Expert:  Zoey, JD replied 1 year ago.

Hello,

There is a great deal on the web about standby letter of credit scams, some of which are very, very sophisticated. At their most obvious, they are in the nature of an investment opportunity where you are told you'll be able to realize a gain. That does not appear to be what's going on here at all. However, all standby letters of credit scams involve the payment of an up-front fee, and since yours has one too, the possibility that this deal is not on the level is still real.

This article should be very helpful to you. It is comprehensive in breaking down the various components of a standby letter of credit and in showing how easy it is for scam to occur and in what way. (See link) You will find much of the article instructive, but you want to concentrate on section #9, which takes up a standby letter of credit for the funding of projects. It should help you to sniff out a scam.

Additionally, in section #8, it references the International Chamber of Commerce in the UK as a good resource to authenticate a letter of credit.

The people who run this scam are generally articulate and convincing. This, and hiring a lawyer you spoke of (choose one independently. That is, don't accept a reference from the people you are dealing with, lest he turn out to simply being a party to the scam). Find one yourself through normal channels.

Hope this helps.

Zoey, JD, Attorney
Category: Legal
Satisfied Customers: 16801
Experience: Active member of the NYS bar since 1989
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