India's Enforcement Directorate (ED) has arrested the director of Hong Kong based Hoewelai Jinsu, Anup Nagaral in connection with a case of alleged fraud that cost lenders nearly US$250 million after they extended credit to the fraudsters.

The fraud used letters of credit (L/Cs) obtained "under the guise of merchant trade" according to the directorate.

Tripartite merchandise trade

Hoewelai Jinsu was one of the parties in the buyer leg of a tripartite merchandise trade with Spices Trading Corporation Limited (STCL) and overseas buyers and sellers, named by the ED simply as FMPL and FEIPL.

FMPL and FEIPL failed to honour the tripartite agreements, even though they had provided guarantees that payments would be made by overseas buyers.

Personal and corporate guarantees

The chairman and former managing director of FMPL and FEIPL, respectively Naveen Sriram and Sudheer Sriram, meanwhile had executed a deed of personal and corporate guarantee in favour of STCL against the latter agreeing to provide finance for facilitating trade between the parties concerned.

The guarantees could be invoked by STCL in the event of any default in repayment of dues.

L/C abuse

STCL issued irrevocable letters of credit (L/Cs) with a validity period of 90 days.

However, the L/Cs devolved due to non-payment by the overseas buyer, and since the guarantees were not honoured this resulted in a wrongful loss of US$249.57 million to STCL.

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