Letter of credit: what to do if a bank pays against forged documents?

Letter of credit: what to do if a bank pays against forged documents?

A letter of credit is one of the safest payment methods under a contract. It is a type of bank guarantee under which the seller receives payment upon presentation of all documents agreed by the parties.

However, even a letter of credit cannot guarantee 100 per cent risk-free payment. For example, there is not much the bank can do in cases of fraud, where the seller provides forged documents in order to receive payment.

In this article, we explain how to act in cases of fraud based on our recent experience.

Background

"Hermes" (the Buyer, Switzerland) entered into a contract worth US$1.5 million with "Loki" (the Seller, Poland) (all names are fictitious, coincidences with real persons, Greek and Scandinavian Gods are accidental). The contract concerned the delivery of copper cathodes under FCA terms by railway against payment by way of an irrevocable letter of credit.

The delivery was a few weeks away when Hermes' Swiss bank unexpectedly informed it that it had already transferred the money to Loki upon receipt of all the documents for payment from the latter, including of quality certificates from the cathode manufacturer.

Hermes attempted to clarify the situation with Loki, but Loki did not respond to either phone calls or letters. Therefore, we had to contact the manufacturer directly.

It turned out that the manufacturer had never heard about Loki and had no dealings with it. It became obvious that Loki had simply forged all the documents.

What was the problem?

In the case of an irrevocable letter of credit, the bank cannot change the terms of payment without the consent of both parties. Technically, if the bank receives all the documents "as listed", it is obliged to make payment.

Since the documents appeared to be in full compliance with the instructions, the bank had no reason to refuse the payment. Moreover, according to UCP 600, the bank is not responsible for the authenticity of the documents.

Further action

It usually takes 2-3 days for international payment to reach the beneficiary's account. In our case, most likely, the money was 'frozen' somewhere in transit, but it was not clear where. To find out the exact whereabouts of the payment, Hermes required another day, which it simply did not have. For this reason, Hermes decided to freeze the payment from two "ends" simultaneously: in Switzerland and in Poland (where Loki`s bank was located).

In Switzerland the court ordered Hermes' bank to cancel the payment. It was not known whether the bank would be able to enforce the order in practice, but at least it was the basis for initiating the cancellation proceedings.

In Poland, Hermes initiated a criminal case in which the prosecutor seized Loki's account.

Both arrests were obtained in 2 days and without Loki's involvement.

It was soon discovered that the money was 'frozen' in an account belonging to Hermes' correspondent bank. The bank cancelled the payment based on the court order, and the US$1.5 million was safely returned to Hermes.

Conclusion

In cases of letter of credit forgery, the most important thing is to react quickly, seize the relevant bank account(s) and cancel the payment. However, it is impossible to do so without arresting the bank account(s).

In our case, the buyer contacted us as soon as it became aware of the situation. The story would have ended less happily had Hermes delayed matters even by a day.

Danil Hristich, Xavier-Romain Rahm, Sergey Platonov and Erlan Moldoshev were in charge of this matter.

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Team members
Danil Hristich
Xavier-Romain Rahm
Sergey Platonov
Erlan Moldoshev
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