A Johannesburg court has been hearing how standby letters of credit (L/Cs) are making an appearance in scams inspired by soaring gold prices.

The gold price is currently hovering at its highest level for 25 years at around US$600 an ounce. This provides a new context for such scams, but the standby L/Cs are sometimes being used in a part of the scam that is essentially a familiar so-called prime bank fraud of the kind that has been around for years.

Lost deposit

The scam currently in the South African court involves a Johannesburg lawyer who was approached by an acquaintance to provide a deposit of US$500,000 in a trust account for a gold bullion transaction. In return the lawyer, as an investor, would receive commission of US$8 million on his investment.

Subsequently the lawyer was contacted and told that the bullion sale had fallen through. When he inquired about his deposit, he found it had been taken.

The scams

There are dozens of similar scams, many of which can be found on the Internet, all of which have the same things in common.

The fraudsters act as intermediaries and attract 'buyers' and 'sellers' prepared to participate in bullion deals. Each buyer and seller is asked to put down a deposit or pay an advance fee. Eventually the supposed sale falls through and the buyers and sellers lose their money.

L/C variations

The L/C element may be introduced when through the intermediary the seller asks the buyer to provide finance for a standby L/C that will guarantee the deal.

In another variation, the standby L/C may feature, not only as part of the bogus bullion deal, but also as a money-maker in its own right, appearing as one of those fictitious L/Cs promising returns of 100 per cent or more because it is operated by some secretive governmental or financial institution. Such L/Cs inevitably turn out to be fake.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.