For the sake of new investors ("green horns")not being taken to the cleaners, it is highly recommended for the investor (beneficiary), to obtain the correct confirmation in writing--from the advising bank---that the L/C is real and not a piece of worthless piece of paper.

Wide scope of international frauds

International frauds are now growing at an alarming rate due to popularity of the Internet and modern computers. The “scopes” can be classified into many categories, such as HYIP (High Yield Investment Programs / PPP), unclaimed estates, dormant bank accounts, deposit frauds, lucky draws, long distance calls, black USD currency notes at discount and many other. Rightfully so, readers of this forum are mainly concerned about this topic, For now, I would like to narrow down the scope to letters of credit (L/C) and its related frauds.

How to avoid a fake L/C?

Today, due to popularity of the SWIFT (Society for Worldwide Interbank Financial Telecommunication) standard messages, that are issued at low cost, easy to use, fast, highly reliable and very secured (so far hackers have not found a way to break into it), nearly all L/Cs are issued by SWIFT standard message. Only the senior management of banks have the authority to authorize sending of SWIFT messages. Hence L/Cs issued or otherwise advised by SWIFT messages should all be genuine. Even on rare occasions, a few "fake" L/Cs were in fact issued by senior managers in banks, due to one or other reasons (read: bribe), they should be considered still valid by local law because they were issued by authorized persons in the bank. The issuing bank must take up the legal responsibility. L/Cs issued by SWIFT are most safe hence if we are holding an L/C issued by an issuing bank, "signed" by an authorized manager (in fact we do not see any signature on the L/C advised by a SWIFT message but the internal documents in the issuing bank should show the signature of the senior managers who authorized such issue), it should be a valid payment undertaking, provided that the presented documents have no discrepancy.

The first step to avoid fake L/C is to insist on SWIFT advised L/C. The receiving banker may check with the advising bank to verify "whether the original L/C is in fact transmitted by a SWIFT message from the issuing bank to the advising bank", although the L/C from the advising bank to a beneficiary is not by a SWIFT message (simply because SWIFT is not available to the retail end of the consumer chart).

From my experience in dealing with L/C, most fake L/Cs are issued either by airmail, fax or telex. Since there is no provision in either the uniform rules governing L/C, the UCP 500, or any banking legislation and regulations, to restrict an L/C to be issued only by SWIFT messages, it follows that L/C can be issued by any means. Due to the popularity of SWIFT messages, L/Cs issued by other means should be treated with caution to avoid frauds. Under UCP 500 Article 7 (a) the advising bank has a duty to check for the "apparent" authenticity of the L/C.

Otherwise the advising bank has an obligation [under Article 7 (b)] to notify the beneficiary without delay, its inability to obtain apparent authenticity of the L/C so advised. But the level of authenticity is only up to the so-called "apparent" level. It does not mean "real" or "factual" authenticity. The advising bank is also protected (Article 15) not to be liable or responsible for the genuineness, falsification or legal effect of the L/C so advised.

Check for authenticity of L/C received by airmail, fax or telex. It is highly recommended for the investor (“the beneficiary”) to obtain confirmation of the L/C in writing---from the advising bank---for the authenticity of the L/C.

Sometimes, you may have to pay additional banking charges, if the advising bank considers that it has exercised reasonable care as required under Article 7 (b) and refuses to do anything else. You have to understand that the L/C market is highly competitive and the advising bank must control its cost carefully in order to safeguard its slim profit margin out of the thin advising fees received. Therefore, the advising bank might ask for additional service charge for doing additional work to meet your request.

For a “green horn” (amateur) investor, with low funds, the service charge may put an extra burden on its operating cost. Even so, it is highly advisable for the investor to check the authenticity of the L/C. Ignoring this advise, simply based on the extra expense, would be a mistake. Don’t be---“Penny wise and dollar foolish!.”