How to detect fraudulent documents in DC presentations?

[david]

Hi TO - greetings from Frankfurt

Long time - no talk! I just have one contribution which I am sure you recall from some years back.
Deal Knowledge
Ease / Mitigate the Risks
Understand the Risks
Transaction Monitoring
Staff Training
Client Relationship Maintenance
Hoaxes / Fraud Awareness
Ensure the Documentation is Right
(The clue is in the acronym). Hope to see you at the next Commission meeting.

Best regards
Dave Meynell

[T.O.Lee]

Welcome to the party Dave,

As a friend, we would joke that your puzzle refers to the second winner in World Cup 2002. We do hold high respect for the German team as we guess the final is to be played between Germany and Brazil.

As a consultant, we would say that you are referring to your risk management article in one of the issues in the DCI, which we also quote in our Expert's Report in DC fraud disputes.

If members wish to read this article, they may click the author's name “David Meynell” in the DC Pro search facilities.

Hello Jeremy,

Do you know that we purposely leave the question “a banker can smell the documents to dishonour” to you so that you may make good use of your legal knowledge to answer this question?

From the World Cup 2002 games, we have noted that we should pass the ball to the other player who is in a better position to shoot.

www.tolee.com

[edited 7/1/02 4:57:37 PM]

[NigelHolt]

Thanks, T.O., that was jolly considerate of you.

[DimitriScoufaridis]

T.O. Lee,
David's points are on the same wave length.

Dimitri

[DimitriScoufaridis]

T.O. Lee,
I’m not sure whether you were seeking specific tips on how to detect fraud. My response is not limited to LC doc’s only. Here are some examples:
1. Receiving an unauthenticated message (tlx) indicating that an LC has been issued by a bank and stating “We hereby open our uncoditional (misspelled) irrevocable, transferable and confirmed letter of credit ….” Some suspicious phrases were used; moreover, it turned out that it was sent through a public booth not a bank, so watch out for suspicious phrases & untested messages!
2. “We hereby issue in your favour this documentary credit which expires on… for negotiation this documentary credit is available for negotiation of your draft at sight…” Other requirements - “2% cash deposit with the issuing bank before shipment”. Poor language and structure!!
3. Fraud is certainly not limited to LC’s only. This is an example of a fraudulent letter of guarantee: “…Maturity date: One (1) year and one (1) day, amount: USD 15,000,000 … We …. hereby unconditionally irrevocably and freely transferable without protest or notification, guarantee to pay against this letter of guarantee… This letter of guarantee is assignable and transferable without presentation of it to us and without payment of any transfer fee. This letter of guarantee is subject to the laws of … and furthermore to the Uniform Rules For Demand Guarantees (ICC publication 458) and the Uniform Customs For Documentary Credits (ICC publication 500).” Again watch the language used! A prime bank instrument fraud.
4. In LC doc’s
a. The Solo scam. The issuance of a container B/L that does not list the container numbers. However, UCP does not stipulate that container B/L’s must state the container numbers.
b. A veterinary health certificate valid for 10 days has an altered date of issuance. Tampering with such a date is dangerous. A doubtful intention aiming to keep the certificate valid!
c. Along with other discrepancies, a B/L is received that is unsigned and does not bear an “on board” notation. The client checks with the shipping agent and finds that the goods were not shipped! Doc’s are returned unpaid.

Some of the dos and the don’ts to consider when encountering suspicious transactions
Dos
KYC
Question changes or irregularities in customers’ normal business patterns
Staff training on fraud awareness
Refer suspicious transactions to management
Don’ts
Don’t allow customers to pressure you into making impulsive decisions
Don’t discuss internal operations or systems with outsiders
Don’t write to suspicious individuals on company stationery

T.O. Lee,
We are in the middle of the seven banking day period. Please make sure that you present your views within a reasonable time!!

Dimitri

[T.O.Lee]

Dimitri,

From various past postings, we notice that after our inputs, there are no more inputs coming from other members.

So we would like to give everybody a change to speak up, like what you did (our thanks for your excellent experience exchange), before we offer our part.

Please let us have a reminder for the expiry of the 7-business day time limit. What would be the penalty for breaking it?

www.tolee.com

[DimitriScoufaridis]

T.O. Lee,
This is a reminder that the seven banking day period has expired. I guess the penalty charge is waived. Any comments?

Dimitri

[T.O.Lee]

TO RESPECT JEREMY FOR HIS FIRST REQUEST

We still remember that the first request for us to share our experience and knowledge on “how to detect fraudulent documents in DC presentations” comes from Jeremy.

Since Jeremy is a banker that refuses to learn any non-banking things, then we have to respect him and limit our scope to those skills and knowledge known generally to a banker, unless Jeremy would change his mind and agrees that bankers need to know non-banking knowledge as well. What is the use for giving Jeremy something he cannot use, because he has no such non-banking knowledge that is required to detect more sophisticated “footprints” on the face of fraudulent documents? .

Some of the things are already covered by previous postings made by Davie, Dimitri, and Philip. So thanks to them for their valuable inputs and we are not going to repeat them here.

UNDERSTAND OUR ENEMIES

Sun Tse, the famous ancient China warlord (whose writings now become a “must learn” in West Point USA), has a very famous saying: “Those who know their enemies would win a hundred times in the battle field”.

The first step is to understand our enemies, the fraudsters who may be your customers, the beneficiaries, the applicants or the “DC promoters” (not Don King of course and to be explained later).

From our ten years’ experience in dealing with DC frauds, fraudsters, like consultants, can be categorised into two main groups:

THE PROFESSIONALS

Such as those from Nigeria, who have good education in USA or London, handsome, well groomed in Amano, polite and elegant? Their English is professional. However, due to no more oil production, their parents cannot support their glamorous lifestyle and hence they have to make money by cheating. According to ICC Commercial Crime Services now headed by Captain M (not in James Bond’s office of course), some of them spend their money earned from frauds by buying Rolls Royces, jewelleries and caviar. For Chinese we would buy a house to generate continuous rental income streams.

Their defects are to use creative terminology which is not used in the particular trade, such as those pointed out already by our three friends, RWA, one year and one day, ICPO, 500 prime banks, Grade “A” sugar, so on and so forth.

When you see these magic words, they provide the “footprints” for frauds.

Once we were approached by them through email to help updating their “how to cheat people” menu, which we reply politely that this is not within our scope of services. Of course they would use unclear words to imply what they actually mean.

THE AMATEURS

They are from the trades, being importers, exporters, and mostly owners of the businesses. When they open their companies, they intend to do genuine businesses. Only due to trading losses, failures in personal speculative ventures, and other reasons, that they are forced to create DC frauds in order to get the money for survival.

THE FAMOUS AND LEGENARY SOLO CASE FORM UAE

So far we know one company that they open the company just for the purpose of creating frauds. This company is the Solo Group in UAE. And they keep on cheating for ten years before they are uncovered, by a young bank officer who challenges the decision of the senior managers, after learning from workshops and books and notes that the Solo Group documents have “footprints” of frauds. This is amazing! Before that all the big banks rate this Solo Group as an AAA customer.

By the way, we do know one bank whose branches around the world are involved in each big fraud case that we have handled so far, in whcih there is more than one issuing/confirming/negotiating bank. However, very strange, we never receive any request to provide training workshops on detection of fraudulent documents from this bank group. They do need them to save them from losing millions and millions of dollars each year.

This Solo Group later even owns a freight forwarding company and a carrier with the money earned from fraudulent DC operations, where the beneficiaries, the applicants are all their men. They become a conglomerate with diversified trades. This makes the banks trust them even more. We hope one day we can invite the Solo Group owners or operators to do our fraud workshops for us. This is much better than those training approaches preferred by our friend Jeremy, a banker to educate another banker.

We have to stop right here and will continue tomorrow as we have to divert for “rice and noodles” expert witness report business.

Those who have actual involvements in the Solo fraud cases, please make more insider's inputs here, or correct some of our comments here which we come to know when we were consulted on the Solo cases in UAE. But so far we have not yet received any real assignments.

“So stay with us! Don’t go away!” said Larry King of CNN.

www.tolee.com

[edited 7/11/02 6:30:14 PM]

[T.O.Lee]

This posting is in additional to and to be read in conjunction with our previous posting for best comprehension of this subject.

To save us time for earning our rice and noodles, shall we quote a few pages from our “How to detect fraudulent documents in DC operations?” workshop in 1999, which is copyright protected. Any member who wishes to use these pages must obtain our written permission and also has to expressly and prominently point out the source of the information (from T. O. LEE Consultants Ltd.) in his handouts or presentations or he or she will be subject to legal consequences.

QUOTE

AN OVERVIEW OF THE L/C FRAUDS MARKET

From our own experience in dealing with trade frauds involving letters of credit, international fraudsters can be classified into three main groups:

(I)The Amateurs

The Empire Builders
The Speculators
The Hit-and-Runners

(II)The Semi-professionals

The L/C Brokers

(III)The Professionals

The Fraud Artists
The Fraud Masters
The Franchisees

GROUP 1 THE AMATEURS

A The Empire Builders

(a) They may have huge initial successes in expanding their own businesses aggressively through opening many new local and overseas branches within a short period of time, by franchising, or investing in other much diversified businesses of which they have no experience at all. When the economy continues to grow, their assets grow in frog leap pace. Those high profile ones may become heroes in the business magazines. They may also create innovative business management concepts and buzzwords to explain their successes and to boost the sales of business management books they write.

(b) However, most of their expansions and investments are financed by loans from the banks and other financial tools. When the economy turns bad, their empires collapse instantly due to sharp fall in stock market prices, resulting lack of cash flow and inability to meet short termed liabilities.

(c) Before the bad news spreads out, they try to commit trade frauds to meet their short termed liability needs. Letter of credit is usually picked up as an effective fund raising tool because the transaction amount is big and not many efforts are needed. Secondly it is easier to obtain finance from the banks on import/export loans than overdraft or other forms of loans. The interest is also lower. Chances of success are also quite high because document checkers in the banks have not been specifically trained on techniques in detection of fraudulent documents. Most of them know only banking and not transport or insurance practices, making "footprints" in these documents not easily detected.

(d) They may enjoy very good relationship with their bankers and may even have bribed the senior managers in the banks as in the Korean textile L/C fraud case reported in our DC website http://www.tolee.com.

B The Speculators

(a) They try to divert their cash flow to speculative activities, such as real estates, stock market, Hang Seng index leverage, futures, commodities, foreign exchange and the like.

(b) Their own well-established businesses (which may be inherited from their parents) cannot provide further expansion opportunities or continue to give impressive financial results. As a better-educated second generation with more available resources, they may face a strong pressure and may also have a keen personal desire to out-perform their parents.

(c) They cannot resist the temptation of getting rich fast, after witnessing so many success stories promoted by the local magazines and newspapers.

(d) Although the local economy is still healthy, but luck finally turns against them in their speculative activities. That becomes the right moment to milk the cow – to turn the good will value of their companies and the trust given to them by the banks and their long time trading partners into hard cash.

C The Hit-and-Runners

They are mostly those who are not lucky in their businesses and are near the threshold of bankruptcy. They try to commit frauds to raise their retirement funds. With the money in hand, they try to spend the rest of their lives in a remote island in the Pacific or in Africa, Middle East, Central or South America.

GROUP 2 THE SEMI-PROFESIONALS

They are the so-called “L/C Promoters”.

(a) They are currently traders or retired traders, understanding every detail of the letter of credit operations, in particular the weaknesses of the banks.

(b) They understand the long established practice amongst Indian trading firms which open letters of credit (as the applicants) for a commission on behalf of those who have no or not enough import credit facilities.

(c) They approach those companies that have surplus import credit facilities, which have not been fully utilized. They offer 5% commission for letters of credit opened on their own behalf or on their friends’ behalf.

(d) The bankers assume that the letters of credits are opened for their customers’ own imports and hence do not raise any doubt to these transactions until the frauds surface. Often it would be too late to stop the crimes as the fraudsters have already got enough time to plan their exit. The Macau L/C fraud cases in our website are good examples.

GROUP 3 THE PROFESSIONALS

Creating frauds is their profession and core business. Their activities are global. They may originate from Nigeria.

A The Fraud Artists

(a) They are specialists in letter of credit operations, with most updated knowledge in international trade climate and well versed with local trade laws of the main trading countries.

(b) They may form alliances with traders, freight forwarders, inspection and surveying agents, lawyers, barristers, financial and investment advisers, fund managers, bank supervisors and managers, government officials and even professional killers.

(c) They appear to be well groomed, polite, pleasing, intelligent, well educated and with good taste. They command good English and give others a first impression of professionalism in international trade.

(d) The techniques in making frauds are becoming more and more sophisticated. It has now become a form of art. People have started to address them as Fraud Artists.

B The Fraud Masters

(a) They write the Frauds Manual “How To Cheat People”, sell to greedy buyers (the Franchisees) for a fee, train them how to use it, provide after-sales-support and take commissions from their revenue.

(b) They are engaged in much diversified frauds, for example, MLM (Multi Level Marketing), HYIP (High Yield Investment Programmes), financial papers trading, commodity frauds, chartering scams, deposit frauds, black money scam, lucky draw frauds, mail order scam, Internet frauds, Y2K frauds and the like. L/C (including standby L/C) fraud is only one single category of these frauds.

C The Franchisees

(a) They are greedy traders with absolutely no business ethics and are ready to get rich fast by any possible means.

(b) They work with the Fraud Masters behind the scene who sell to and train them for the techniques and provide the back up documentation and consultancy required to perform the frauds.

(c) The jargons and documentation used by them are typically the same because they are from the same Fraud Master, for example, RWA, NCND, AWSP, ICC 600, UCP 600, one year and one day, grade A sugar and the like.

(d) They are mostly local people. From the overseas enquiries received from emails, facsimile and long distance calls, we have found them now quite active in Hong Kong, Taiwan, China, Korea, Vietnam, USA and Canada.

OUR IMPORTANT FINDINGS IN DEALING WITH INTERNATIONAL TRADE FRAUD CASES

1 God is very fair to us as He treats us, whether fraudsters or not, all equal.

2 For this reason, fraudsters always leave some "footprints" in the fraudulent documents. For the Franchises, these foot prints are jargons the Fraud Masters have created, such as RWA, NCND, AWSP, ICC 600, UCP 600, one year and one day, grade A sugar and the like. These jargons can be easily identified if you have attended our fraud prevention workshops.

3 However, to identify other "footprints" you may need profound knowledge in international trade practices, surface, air, maritime and multimodal transports, chartering practice, cargo insurance, Incoterms 1990/2000, inspection procedures and most important of all, common sense, which may not be with some of us when we are blindfolded by greed, oversight or wrong perceptions.

4 The purpose of this workshop is to help document checkers in the banks identify these "footprints" by working on the case studies which are derived from the real fraud cases resolved by us, with the sensitive data, information or clues which may reveal the identities of our clients all removed.

5 We sincerely hope that this workshop may achieve its objectives in preventing traders, bankers and other parties getting hurt in international trade frauds involving letters of credit, which are growing rapidly after the Asian economic turmoil.

UNQUOTED

That is all for the day, folks. Bon Appetit!

www.tolee.com

[edited 7/12/02 9:18:59 PM]

[T.O.Lee]

This posting is in addition to and to be read in conjunction with our two previous postings for best understanding of this subject.

MISSION STATEMENT OF SOLO

The Solo Company from UAE is unique and stands on a category of its own. It is of course not an amateur because this company opens just for the purpose of cheating. It mission statement appears to be:

“Our business is to create frauds with the minimum effort and to maximize results. We strive to achieve excellence by sophistication, to achieve globalization and diversification of trades. Our survival, as well as our competitive advantage, relies solely upon the UCP 500 Article 13 and 14, where bankers need not have to know about non-banking knowledge.”

Hence they can carry on frauds without interruptions for ten long years. They soon become the AAA customers for the banks in Middle East. This is the result of bankers who insist that they need not know non-banking knowledge. Otherwise they should have been identified within six months, at the most.

SOLO AS AN ENTERPRIZING FRAUDSTER

They are in fact more than a professional, compared with the Nigerians, who are “gypsies” as they wander from one country to another, without any permanent office. They stay in luxury hotel suites but you cannot find them. Don’t call us. We will call you. Sometimes the Nigerians make a lot of excuses and give their victims a mobile phone number, such as in the black US dollar fraud. The Sole people have branches in other strategic countries and you can visit their glamorous offices.

Using the money earned from frauds, they buy out the freight forwarders, the small carriers, and maybe the inspection agencies and issue “genuine” bills of lading. The carriers sign them. We would categorize them as the Enterprising Fraudsters.

CHECKING FOR CONTAINER NUMBERS WON’T WORK OUT FOR SOLO

They use real containers to carry real goods for the first shipment. Then they use the same container numbers to create other fraudulent bills of lading where there are no goods on board.

So checking for the container numbers in the bills of lading, as suggested by our friend Dimitri won’t work out for solo.

CONTAINER NUMBER CHECKING SOFTWARE

Where there is a trick, there will always be a solution. The only trouble is that document checkers have to do more work than is necessary under Article 13 and 14. He may write a software for checking container numbers. All container numbers used by one company in their previous presentations are stored in that software as database. The software will give you a warning should the same container number or numbers appear(s) in another future by that same company. If you find four containers with exactly the same container numbers to be used again in a later shipment, that should be a clear “footprint” because it is very rare, if not impossible, that the carrier will use the same four containers for a particular shipment for the same shipper again.

UCP 500 ARTICLE 13 & 14 TYPE OF BANKER IS NOT ENOUGH TO DEAL WITH FRAUDSTERS LIKE SOLO

For a professional operator like the Solo Group, document examination needs a professional banker. Those bankers trained by a banker who refuses to learn non-banking knowledge cannot do this job for obvious reasons.

We have to thank the Solo Group because after the Solo case was uncovered, our fraud detection and DC risk management workshops are welcome in the Middle East and Asia.

That is all for today. We will continue tomorrow. “So stay with us. Don’t go away!"

www.tolee.com

[edited 7/13/02 4:51:32 PM]