Back-to-back letters of credit (L/Cs) can be used as a sanctions evasion technique according to multiple sources who contributed to a new guide published by the Middle East and North Africa (MENA) chapter of the Global Coalition to Fight Financial Crime (GCFFC) and the MENA Financial Crime Compliance Group (MENA FCCG).
Standby L/Cs can also be misused in a money laundering scheme according to the MENA trade-based financial crime reference guide, which provides explanations of how both L/C types can be used criminally.
The guide provides an example of how a back-to-back L/C can be issued by Bank A as collateral to Bank B in order to issue a separate L/C to the beneficiary. This often happens when the underlying agreement between the applicant and beneficiary contains stipulations that prevent the applicant’s bank from issuing a direct L/C to the beneficiary.
A sanctions evader can use a back-to-back L/C to remove the name of a sanctioned bank from the documentation more effectively than would be possible with a transferred L/C. With a back-to-back L/C, the beneficiary receives an L/C from an unsanctioned bank without mention of the original issuing bank.
The bank named as beneficiary on the initial L/C would need to be complicit in this arrangement, or at least negligent, to remove all mention of the sanctioned institution from the outgoing L/C.
The guide says the use of the standby L/C for money laundering involves collusion between both applicant and beneficiary, as the two ensure that the terms and conditions of the standby L/C are violated by the applicant, thereby effecting a payment to the beneficiary.
It is in the payment to the beneficiary stage that the funds are laundered, as the beneficiary is often offshore and outside the jurisdiction of the applicant’s country of residence. The payment to the beneficiary can be allegedly justified by the documentation associated with the standby L/C, thereby lending additional legitimacy to the transaction.
Pulling the trigger
For a standby L/C to be of any use to a money launderer, the trigger in the agreement between both applicant and beneficiary must be pulled. Without this breach of the standby L/C, no payment step is initiated.
The guide indicates how an organisation can avoid taking part in this type of sanctions violation by watching out for red flags such as instructions to amend the terms, alter the destination of goods, change the name of a vessel, remove a bank or applicant name, or change a financial institution or applicant name.
An English version of the MENA trade-based financial crime reference guide can be found here.
An Arabic version of the MENA trade-based financial crime reference guide can be found here.
Categories: Trade Based Financial crimes News