India's intelligence agencies are taking a close interest in letters of credit (L/Cs) as concerns increase over the practice of traders grossly mispricing goods so they can keep US dollars overseas and benefit from the depreciating rupee.

Government officials suggest these mispricing scams could be worsening India's current account deficit by depressing inflows of US dollars.

Agencies vigilant

India's customs authorities, directorate of revenue intelligence and enforcement directorate are keeping a close watch on practices that had been largely curtailed a few years ago as India tightened its anti-money laundering controls.

Now the authorities say they are seeing cases of exporters under-invoicing to store US dollars overseas while importers are over-invoicing goods to ship US dollars out of India.

L/C misuse

A 2012 study by the enforcement directorate for the Asia Pacific Group highlighted how international trade denominated in international currencies increases vulnerabilities of exchange rate market.

The study also highlighted how L/Cs can be amended or extended in mispricing scams and Indian officials now say that, acting on this information, they will be looking at documentary credits very carefully.

Mispricing scam

The usual practice is that exporters would declare a lower export value on L/C documentation than the goods shipped are really worth.

The recipient of the goods would then remit the difference between the amount shown on the L/C documents and the real value of the goods in a foreign bank for a commission.

Similarly, importers would inflate the real value of goods purchased on L/C documentation and the difference would then be remitted in a foreign bank.

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