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In the months since the last issue of DCInsight appeared, a variety of L/C-related frauds have surfaced. The most prominent of these have been situated in the US and Hong Kong and, in some cases, have involved transactions via the Internet.

In one case, a US couple who offered to pay mainly by an L/C for a vintage car they saw advertised on the auction site eBay were conned out of tens of thousands of US dollars by the bogus seller who said that only cash up front would do for him.

Car enthusiasts Joan and Larry White located a 1940 Ford Deluxe Convertible while browsing eBay Motors in December 2007. Larry White suggested to the "seller" that they take their deal offline because he was concerned about scams on eBay he said he had heard about. The "seller" was happy to take the deal offline and, in the days that followed, Joan White suggested she send the seller USD 1,000 in cash and an L/C for the balance. The "seller" rejected this idea. He said many other people were interested in the car and the couple would have to act fast if they wanted it.

Finally, the Whites were persuaded to wire the sum of USD 31,000 to an account maintained by a company at the Bank of Montreal in Canada. The Whites received confirmation from the "seller" that he had received the money, but communications with the supposed seller ended at that point, leaving the couple without the car they thought they were buying and the cash they sent to pay for it.

A second man agreed to plead guilty to federal charges in connection with an Internet sales scheme in which nearly USD 15 million was netted from people across the US who wanted to buy electronic gadgets.

This defendant faces up to 15 years in prison and fines totalling USD 500,000 for his part in the 2005 scam that conned suppliers and customers of Mixitform.com - supposedly an Internet vendor of iPods, Xboxes, PlayStations cell phones and other consumer electronics - out of millions of dollars. Essentially, the scam involved Mixitforme.com staff taking payments for customer orders that were never fulfilled.

Suppliers, meanwhile, were not paid, but they had been convinced to supply the company, partly based on fraudulent L/Cs created by a former banker who was the first person to plead guilty. The other defendant said he was unaware that the former banker had no authority to arrange the L/Cs. Interestingly, the defendant made this statement by phone from an undisclosed location in South America, where he is a fugitive.

These stories underline that L/Cs can provide much-needed security for buyers and sellers of expensive items in Internet-facilitated transactions.

In a more traditional Hong Kong case, two company directors were sentenced by a Hong Kong court for their roles in a HK$ 9 million L/C fraud based on bogus business transactions. One applicant/ defendant was the owner of the now defunct trading company, Chi Shing Industrial Investment Development; the other was the director of Harbor Best Development Limited, a manufacturer of electronic goods. The two defendants were convicted of presenting the Bank of China with false documents, including cargo receipts, signed by them. The documents apparently showed that Chi Shing had supplied substantial quantities of raw materials to Harbour Best, although in reality there had been no such genuine transactions. As a result of the scam, BOC released a total of HK$9.36 million to Chi Shing. Once the proceeds of the L/C funds had been received, the Director of Harbour Best transferred these funds from Chi Shing to a company controlled by the second defendant.

The judge said the fraud had seriously compromised the integrity of the banking system that relies on applicants submitting genuine transaction documents in support of applications for L/C facilities.