How to identify an SBLC "Scam."

Over the past year, we have advised and saved no less than five clients who almost fell victim to financing schemes related to SBLC that turned out to be fraudulent.

Over the past week, we received an enquiry from a long-time friend and client about an 'irresistible' financing offer through SBLCs. We uncovered the conspiracy behind the offer within minutes of our analysis and discussions based on the available documents.

That gave us the idea that perhaps it is time that we share our experience in the public domain before more individuals fall victim to such financial scams.

SBLC: What is it?

To the non-financially trained individuals, fancy financial jargons such as SBLC, LC, MT760, MT199, BG etc., often serve as a facade in painting a false picture of sophistication to the underlying conspiracies. A quick search on Google will reveal that banks provide these legitimate financial instruments. To the eyes of the non-financially savvy, the complexity and technicalities described in online literature further add to its mystique, often exploited by con artists in their portrayal of exclusivity and prestige in their narratives. In fact, though unequivocally, the legitimate use of these instruments indeed exists in practice; however, most of the opportunities readily available to any everyday businessman on the street are frequently fraudulent.

SBLC is the acronym for Stand-By Letter of Credit. To put it in layman's terms, it is generally an instrument for wealthy individuals to 'transfer' or 'loan' their credit limits with their banks to another third party. In return, other forms of incentives frequently come along with the deal. One example would be, for instance, an owner of a publicly listed company taking an interest in investing in a property development project. While most of his wealth is locked in the shares of his public company, he needs help cashing out if he wants to seize the investment opportunity in the project.

What he can do, then, is to encumber, or pledge, his shares to the bank and procure a guarantee in the form of an SBLC. With the SBLC instrument backed by the bank, he can transfer it to the company he intends to invest in, where the company would then be able to use this SBLC to procure a loan from the company's banker. The investor, after that, will undoubtedly receive considerations in the form of vested interests in the project and monetary compensation for lending his credit limit to the company. These returns are often minimally equitable. Otherwise, it would make little sense for these wealthy individuals to part with their monies for unnecessary risks. These deals typically involve a full suite of investment documentation and undertakings, from term sheets to the investment agreement and the financial instruments the investor procures in return, and rounds of negotiations and redlining between parties and their respective solicitors and advisors. Often more than not, much attention will be paid to safeguarding parties' interests in this process, and it is undoubtedly a challenging feat. Therefore, if anyone comes across a deal claiming that the funds can be cleared within a matter of days, it is probably a scam.

Typical Narrative

Most of the cases that we handle often follow a similar narrative:

It starts with an introducer, who can be your friend whom you have lost contact with for a while or a business acquaintance whom you got to know at some networking event and who has been exploring other collaborations unrelated to the SBLC scheme. More often than not, the initial "business collaborations" usually only serve as a red-herring to reduce your defence. Subsequently, the SBLC will be brought in on a 'by-the-way' basis. One common characteristic of such introducers is that they are not residing in your local community. Therefore, in any case, they are prepared to flee if any issue crops up.

Once you are led into the conversation on SBLC, the introducer will start bombarding you with documents and evidence to back the legitimacy of the offer he is providing. He will portray an image that this opportunity is highly exclusive, as his client (a wealthy individual) only trusts his recommendations. He only offers it to you because of your rapport with him and your project has good prospects. Most of us will initially think it is too good to be accurate and begin to feel skeptical. These deals typically involve tens or even hundreds of millions of dollars; no doubt it is too good to be accurate, but you would want it to be true as you could become a multi-millionaire overnight. So you will start struggling between your objectivity and the emotion you desire for the money. Obviously, most of our clients retained some objectivity, and that was when they started calling us to seek our advice in the transactions.

When we took over, we conducted due diligence and forensic investigations on the documents given to our clients by the introducer while continuing to represent our clients in the negotiations and communications process with the introducer. We typically will probe the deal and payment structure, and where ambiguity arises, we will get to the bottom of the arrangements and corner the introducer to commit. In that respect, it allows us to map out the whole model behind the introducer's scheme and identify the red flags and possible intentions behind it.

Common Red Flags

In most cases we handle, we usually do not pass the allegations that the deal is a fraud. Instead, we highlight "red flags" that we identified in our forensic financial investigations and due diligence processes, and we leave it to our clients to draw their conclusions and decisions. The following is a non-exhaustive list of some of the common red flags that we came across in our practice:

1. Sharing of confidential information, "sample information" with you casually
2. Images of unclear identification documents of the counterparties
3. Doctored identification documents
4. Fake email addresses and contact numbers in the sample documents
5. Bogus sample company
6. Upfront payment requirements

Conclusion

There is more to it, but out of those listed above, the requirement for upfront payments is a surefire way to determine that the deal is a scam. These 'upfront payments' could be in the form of introducer fees, administrative fees, bank charges, solicitor fees etc. A general rule we apply is that as long as upfront payment is required before the company releases and receives the proceeds in good order, we consider that a major red flag and our opinions to our clients would always be?‘caveat 'motor.’ It is always good to seek professional advice when encountering a deal that sounds too good. That being said, usually, such an offer is indeed a deal that is too good to be true.