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L/C fraudsters remained imaginative and active since the last issue of DCInsight appeared. While there's no evidence that the financial crisis prompted the latest surge, it's clear that the temptations to defraud will be enhanced in hard times.

Consider the cases of Bernard Madoff, a prominent US trader and former Chairman of NASDAQ, who operated a multi-billion dollar Ponzi scheme until he was arrested in December, and Marc Dreier, a hard-charging US lawyer who forged promissory notes and backed up his claims with phony financial statements and bogus audit opinions from a reputable accounting firm. Following are a few of the latest scams from the US, Bangladesh and Hong Kong.

In the US, a man from Utah who stole money from four people - including a 73-year-old widow - as part of an investment scheme avoided prison through plea bargaining with the state prosecutor. Even though the judge hearing the case wanted to jail Michael Ostler, she had to order, on the state prosecutors' recommendation, a sentence of 36 months probation, 500 hours community service and restitution of USD 130,000.

Ostler's fraud involved promising investors L/Cs valued at USD 2.5 million from a European bank. In a classic advance fee fraud move, each investor paid USD 15,000 for his L/C. Ostler told the investors they could withdraw money from their L/Cs to make loans, invest, buy real estate or pay off debts. But none of them received the L/Cs or their money back. Instead, the court heard that Ostler used the money for personal expenses such as domestic bills and travel.

In Bangladesh, L/Cs may be being used in scams in the volatile urea market. The alleged scams took place against a backdrop of soaring world urea prices, government subsidies and accusations of corruption in the state-owned Bangladesh Chemical Industries Corporation (BCIC). The global price of urea has soared to more than USD 800 per tonne compared with prices of USD 150-200 in 2007. Local media in Bangladesh, however, reported that organized racketeering outfits were making alluring offers of between USD 200-250 per tonne to buyers on L/C terms such that the racketeers are able to cash in L/Cs without delivering the ordered goods. Market sources said that buyers should not take seriously any offers of urea for sale at a price of less than USD 500 per tonne.

Another report suggests that L/Cs may feature in suspect dealings between one of the country's largest private sector urea dealers and BCIC. It appeared that shipments from the private sector supplier to the state-owned buyer were not being completed, even though the L/Cs covering these shipments may have been cashed.

In Hong Kong, a merchant charged by Hong Kong's Independent Commission Against Corruption was convicted for his role in a HKD 260 million L/C fraud. The fraud involved dozens of L/Cs and was based on non-existent commercial transactions. During his trial, the court heard that between 1994 and 1996 the defendant, Chen Xun, conspired with others to defraud three banks in Hong Kong - Kincheng Banking Corporation, Kwangtung Provincial Bank and Bank of China. Chen used three companies to apply to those banks to issue 50 L/Cs payable to Max Rise Industrial Limited.

Chen Xun submitted false documents to the banks showing ostensibly genuine underlying commercial transactions of goods between the three companies and Max Rise to support the L/C applications. There were no such genuine transactions, and the banks were duped into releasing a total of over HKD 260 million to Max Rise under the L/Cs. A Hong Kong court found Chen Xun guilty on five counts of conspiracy to defraud and jailed him for 55 months. A fellow conspirator was jailed for 32 months.

The scale of these frauds, most involving phony documents and non-existent transactions, is breathtaking and throws more light on how easily investors can be fooled by dubious promises of wealth.