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Sea transport and L/C fraud

An expert in maritime fraud has told the Sri Lankan maritime community that trade finance involving shipment of goods by sea can lend itself to money laundering. Companies involved in transporting goods by sea should take more care in their transactions and make sure they know the people with whom they have transactions, says director of the International Maritime Bureau of the International Chamber of Commerce, Captain Pottengal Mukundan.

"Trade finance depends entirely on documents," Mukundan told delegates at a shipping conference. He also noted that substantial sums of money can be paid out by banks because their only obligation is to verify that the documents comply with the L/C terms, regardless of whether or not goods specified in the documentation have been shipped. "Any system which depends entirely on documents will be vulnerable to abuse by money launderers," he told the delegates.

L/C problems in Iraq

Letter of credit arrangements contribute to a raft of problems that hinder the establishment of a functioning government in Iraq, according to the latest report published by the Special Inspector General for Iraq Reconstruction (SIGIR). The temporary US agency established as a watchdog for fraud, waste and abuse of funds intended for Iraq's reconstruction programmes points to the public procurement process as one that lacks rules and causes confusion.

The report cites an example in which an Iraqi government ministry awards a contract exceeding USD 5 million. A High Contracts Committee must review the contract and, if it is approved, the ministry has to apply to the Finance Ministry for an L/C to pay for the contract. For its part, the Finance Ministry has go through two other banks, including some outside Iraq, to expedite the L/C transaction. The report concludes that the public procurement process "causes confusion among ministry officials and creates opportunities for corruption and mismanagement".

Hong Kong investors protest China's trade policy

Hong Kong investors have called on China to accept letters of credit in lieu of cash deposits under Beijing's new trade policy. The new policy says that manufacturers of the cheap goods that have helped China's rapid economic growth over recent years must now pay big cash deposits on the raw materials they import. Hong Kong investors have stakes in nearly half of China's manufacturing companies, and the new policy is likely to have a negative impact on their investments.

Companies that import nearly two thousand types of raw materials such as plastics, metals and textiles that are used to make cheaper goods will have to pay at least a 50 per cent deposit on their import taxes under the new regulations. Some companies backed by investors based in the former British colony will not be able pay the cash deposit required by the new policy, according to Jeffrey Lam, a Hong Kong legislative council member representing the General Chamber of Commerce. A cash deposit would "tie up two, three months of extra cash flow ... it will become an extra burden," he said.

Lam says he also hopes the Chinese authorities will relax the new rules, perhaps until the end of the year when the peak selling season ends. Lam says he is lobbying the Chinese government to delay imposing the new rule and to allow companies to use bank guarantees or L/Cs rather than cash deposits.

Iran switches to yen for crude oil

Iran has asked Japanese refiners to switch to yen rather than US dollar-denominated L/Cs to pay for all crude oil purchases. This, says Tehran, would counter the risk that US dollar transfers may be frozen by increased sanctions. Iran has been backing away from US dollar-denominated transactions since Washington began to put pressure on it last year to curb its nuclear programme, which Tehran has so far failed to do.