Trade-based money laundering linked to letters of credit (L/Cs) is hitting the headlines in India as new fraud cases emerge in the wake of the Punjab National Bank (PNB) alleged fraud case involving jeweller Nirav Modi's diamond dealings.

Investigations and charges are being pursued against more firms in the diamond trade while arrests have been made in an alleged fraud at the prominent Rotomac pen company. All of the frauds appear to have used L/Cs, and concerns are growing that the bad reputation documentary credits are acquiring will cause a credit squeeze.

Impeding growth

India can "ill-afford" a credit slowdown precipitated by fraud at a time when credit growth is showing signs of recovery and the economy is set to grow at a higher pace, the Associated Chambers of Commerce and Industry of India (Assocham) said in a statement.

It notes disturbing reports about banks putting in place what it describes as "impractical rules and procedures for trade finance" that affect both importers and exporters.

Assocham said L/Cs and letters of undertaking allegedly misused by diamond traders are legitimate instruments in global trade and called on banks to be more active in the way they report fraud and conduct their trade finance business.

Loss of faith

The central bank meanwhile has been a concerned about a loss of faith in L/Cs for several years. In a July 2015 directive the Reserve Bank of India asked banks to honour their L/C commitments, even in unauthorised transactions (DC World News, 21 February 2018).

The central bank said failing to honour L/C commitments could affect the image of the banking system as well as L/Cs and other guarantees as payment mechanisms.

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