India's Central Bureau of Investigation (CBI) has uncovered an alleged letter of credit (L/C) fraud involving Chennai-based SLO Industries and Aran Steels.

Directors of the companies and others are accused of defrauding Corporation Bank the equivalent of US$31 million.

Bank complaint

The case began when Corporation Bank filed a complaint with the CBI against SLO Industries, which manufactures ingots and steel structures.

The bank said SLO siphoned off funds through associated entities by round-tripping L/Cs.

Funds diverted

This involved L/C beneficiaries transferring funds into the borrower's bank to close an outstanding L/C, a process that can be repeated several times.

But instead of eventually settling their L/C obligations, the alleged fraudsters used the funds they siphoned off to invest in real estate.

No financial statements

Corporation Bank said it did not realise that SLO Industries was borrowing beyond its means because the steel firm did not provide provisional or audited financial statements for financial year 2015-16 and estimates for next two years.

During that time the bank nevertheless continued to extend credit to SLO Industries on the basis of its credit history. The firm had enjoyed credit facilities since 2003.

"By diverting the transactions to various banks such as City Union Bank, Kotak Mahindra Bank, ICICI Bank, the company prevented Corporation Bank from knowing its strengths and weaknesses," the bank alleged.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.