Article

Note: Thirteen letters of credit for HK$28,959,924 issued by Kincheng Banking Corporation were supposedly required by Applicant, Crown Apex Development Limited, to fund its purchase of auto parts and stainless steel from Beneficiaries Guang Shan Metal Import and Export Company Limited and Daihatsu Holdings Limited. Beneficiaries presented documents and were paid a total of HK$28,369,217 by Negotiating Bank, Toronto Dominion Bank, which forwarded the documents to Issuer for reimbursement which it received.

In fact, the bills of lading presented were false as were the accompanying documents, and the freight forwarding companies that supposedly issued them did not exist. The companies were fabricated by Applicant. Moreover, there was no genuine transaction between Applicant and Beneficiary. The LC proceeds were either returned to Applicant or placed in one of the Beneficiary's accounts. Applicant and Beneficiary Guang Shan Metal Import and Export Company Limited faced three alternative charges of conspiracy to defraud and were convicted by the District Court. On appeal, affirmed. Daihatsu Holdings Limited pled guilty at the outset of the trial to a charge of conspiracy to defraud Negotiating Bank.

Applicant and Beneficiary argued that Negotiating Bank was not defrauded and did not suffer a loss since Issuer paid out in full on the letters of credit. They cited UCP500 Article 14(a), which provides that Issuer is bound to reimburse a Nominated Bank for negotiating letters of credit, as long as the presented documents appear on their face to be in compliance with the terms and conditions of the letters of credit. The appellate court rejected this argument, stating that in cases of fraud it was immaterial whether or not the victim was injured. All that was required was the possibility that the victim could be prejudiced by the fraud. The appellate court stated:

Here, the conduct of the parties to the conspiracy was to supply false information to [Negotiating Bank] which they intended should be instrumental in persuading that bank to negotiate the letters of credit and to accept risks which it would or might not have accepted if it had known the true facts. In this context, a manager of [Negotiating Bank] testified at the trial that if the bank had known that the transactions under the letters of credit were fictitious, it would not have negotiated the letters of credit. In the event, when [Negotiating Bank] negotiated the letters of credit, it did so on the basis that they were genuine and the bank then gave advance payments to the beneficiaries at their discounted value.

One obvious risk undertaken by [Negotiating Bank] arose from the possibility of questions being raised by the issuing bank on the documents presented to [Negotiating Bank] such as might well have occurred if, before [Issuing Bank] paid out [Negotiating Bank], [Issuing Bank] discovered that the whole transaction had been fraudulently based. At the very least, there was a risk of [Negotiating Bank] having to resort to civil proceedings in an attempt to recover its money from [Issuing Bank] if [Issuing Bank] refused to pay. ... [Negotiating Bank] was at risk just because these were not genuine transactions and there was no saying what [Issuing Bank] may have done had it discovered this before reimbursing [Negotiating Bank].

The Negotiating Bank was at risk because the transactions were not genuine and it was not clear what Issuer would have done had it discovered this before reimbursement. Negotiating Bank may have had to resort to civil proceedings in an attempt to recover from Issuer.

[JEB/tas]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.