Where there is high risk, there are high profitability potentials, and where there are high profitability potentials, scammers are always lurking around the corner.
Over the years, people have told daunting tales of how they’ve lost hundreds of thousands and also millions of dollars to exporters and importers located all over the world who claimed to be able to supply or purchase a certain product, only to turn around to dupe the unwary party.
These stories are sad, disturbing, and many times outrageously true. And the first step to protecting yourself from scammers who plot these schemes is to understand exactly how some international traders lost it all.
From basic to highly sophisticated scams, people are losing a great deal of money every day, and so, I’ve decided to write an article on 4 dangerously sophisticated scams that are costing hard-working international traders millions of dollars every single day!
1). The SBLC Scam:
SBLC is short for Standby Letter of Credit. It’s a bank payment instrument that is used to guarantee payment for a seller on a particular transaction. They operate like strong collateral that gives the exporter great peace of mind, knowing that he’d get paid for the cargo he’s shipping upon arrival or attainment of certain conditions.
Mostly, SBLCs are used for million-dollar transactions, and so, scams that happen regarding its use are mostly million-dollar scams, with a few being worth hundreds of thousands of dollars.
Here’s A Scenario:
For clarity sake, I’d use Man A and Man B to signify the exporter and importer.
So Man B wants to purchase Petroleum products worth $100,000,000 from Man A, a person he has never imported any products ever from, and so, Man A insists he must get an SBLC as the best form of security to guarantee his payment.
First, this looks like a good request, but here’s where it gets dicy:
Man A then goes ahead to insist that Man B makes the validity of the SBLC to be for 366 days.
Now, this is a bit strange.
Why block a Letter of Credit for 366 days when it’s supposed to be a 60 to 90 days transaction?
For the sake of trust, lets’s say we believe Man A has no ulterior motives. And so, Man B decides to block the funds for 366 days.
After Man B blocks the funds for 366 days, 30 days pass, 60 days pass, 100 days pass, and still, Man A hasn’t delivered any products but keeps giving random excuses as to why cargo is tricky to get because of some made-up government stories and/or more excuses.
Now one of two things have happened or is about to happen:
Scenario 1: Man A has successfully used the SBLC to secure a loan from a financier, which he’s then used to run his other far more profitable transactions while Man B waits in vain for nothing till the full 366 days are complete.
Scenario 2: After about 90 to 100 days has passed and Man B starts to panic and is getting worried that so much time has gone and his money is blocked for nothing, Man A lets Man B know that he has secured cargo but certain government officials have seized the cargo unless he pays them “clearance fee” of say, $200 thousand.
Since Man B has waited in vain for nothing and is scared that a full year would pass without him not making any money at all from his $100 million, he decides to support Man A with $200 thousand so that the cargo can get cleared. After all, as Man B would say to himself, “$200 thousand is nothing compared to how much I’d make from the cargo, which could be up to 10% or more of the $100 million over the course of the year from multiple shipments”.
The problem here is that this is the first of many payments and since Man B’s target was to probably purchase 2 or 3 times during the year and in total earn up to 10-30% of his $100 million investment in purchasing the commodity throughout the course of the year, $200k is absolutely nothing for him to use in “supporting his newfound supplier friend”.
In the end, the supplier would let him know despite all the bribes, that the government and other parties have grounded all operations, and that in due fate, his $100 million SBLC would be unblocked at the end of the 366 days (obviously!). And that since what they paid were bribes et al, he can’t ask for the money back for legal reasons that would affect both of their companies.
1). The scam payments don’t just come as clearance fees, but could also be shipping fees, as some scammers would claim to the buyer that they’ve spent all they can on the illegal clearances, but need funds to ship it which could run into over a million dollars.
No matter what the reason is, they’d try to ensure you’re aware they have to make some illegal expenses to fast-track your shipment so that when they claim nothing can be shipped anymore, you’d be unable to report your illegal activity to law enforcement.
2). This can also apply to a Documentary Letter of Credit, but it is mostly done by scammers who mostly only run the same scenario with Standby Letter of Credits because of its flexibility.
What To Do?
Never issue a 366 days SBLC to anyone unless you’ve done a trial order with them before and can trust that their values, beliefs, way of life, and more gives you peace of mind. Else, you’d either have your money blocked and inaccessible to you for one full year, or you’d fall into the trap of bailing them out severally with a few hundreds of thousands of dollars that don’t appear to mean anything because you stay glued to the bigger picture of your eldorado profits, rather than looking at the short-term facts facing you.
But if you must, never issue a Letter of Credit that exceeds 90 days. It must always be within a 90 days cycle as that is enough time for a supplier to ship the commodity to you and for you to have access to your money in the event that they don’t, then reuse it with a different supplier or for something else.
See Also: How To Avoid Getting Scammed In An International Trade Transaction
2). The Government Sanctions Scam:
Some highly sophisticated scammers have found ways to exploit sanctions issued by one government to another to exploit the other party involved.
What you’d read here is one of the most sophisticated scams I’ve ever heard, and the party who told it was the victim.
For anonymity sake, I’d leave out the names of the countries the parties are from, and for storytelling sake, I’d name the victim “Tyson” (Tyson is not the name of the person and does not refer to anyone anywhere around the world bearing this name that may have fallen victim to this type of scam before).
Here we go:
Tyson is from a country that is “well known as a top world power”. In fact, the country touts itself as the most powerful nation in the world.
But Tyson is a successful millionaire hustler whose quest to consistently chase opportunities carry him far and wide to even countries where his country of birth has sanctioned and banned its citizens from doing business with.
So Tyson got a huge petroleum products supply deal from a buyer located in another country (this country manufactures almost everything you can think of) in a different continent.
Since this was a great deal and doing business with this person from that country does not infringe on Tyson’s country’s sanction laws even though his country and theirs are having trade wars, Tyson jumps at the opportunity, then goes to a close third country to find a local supplier for the commodity he wants who can sell it to him at a very cheap price.
Upon finding a great supplier, Tyson tries to rent a vessel in that country to load the goods, but seeing that the costs were too high, he asks his buyer for advice and they refer and tell him he can source a really cheap vessel around the area owned by a business “from a country his own country has banned its citizens from doing business with”.
Problem is Tyson doesn’t know the vessel is actually registered to a business from that other country he’s prohibited from doing business with. He just thinks the owner must be really naive to rent out the vessel at less than half the price others in the same area were offering the vessel to him and happily quickly took the deal before the “naive owner” would realise and change his mind. Or so he thought.
Now, Tyson leases this vessel, loads the goods, and moves the cargo to international waters where his “supposed new found best friends/buyers” who helped him find the vessel deal of the year were going to offtake the cargo and tranship to their own vessel.
Here’s where he meets the shock of his life…
After spending millions of dollars to purchase the cargo, spending hundreds of thousands of dollars to lease a vessel to move the cargo to international waters, and despite securing a Letter of Credit from the buyers before making his purchase, the “so-called buyers” let him know that the vessel is registered to “a country his country had banned all its citizens from doing business with”, and so, they can’t buy from him anymore.
They also tell him that it’s treason in their own country for the government to learn that they’re doing business with a person doing business with that other country, and so, they’re obliged to report the situation immediately to clear their names.
As expected, Tyson immediately enters panic mode, especially as he knows that if they report it, his own country would find out too, and he’d be thrown into jail, possibly for the rest of his life, for what he didn’t know anything about.
So what does he do?
Obviously, he starts begging them with tears and sweat running down his face to forget about it and that he’d find a way to sell off his cargo elsewhere, never do business with a sanctioned country origin business or product again, count his losses, and thank them for sparing him his freedom for the rest of his life. After all, they’re really nice guys.
But now, here comes the scam…
The buyers now tell Tyson that they’ve waited too long and must purchase their cargo, but to let everything slide and to keep them from reporting the situation, Tyson must take off a few millions of dollars from the price!
I mean, Tyson’s original profits weren’t even up to half the amount they wanted him to take off, but they had the upper hand and had him against the wall because his whole life was about to be thrown away once the news of his “supposed business relationship with the sanctioned country came up!”
What do you think he did?
The guess is yours.
What To Do To Avoid These Types Of Scammers?
First, do your research on whichever buyer is procuring from you to see their purchase history and how they’ve fared with other suppliers they’ve done business with. Also, ensure that the companies you’re using to execute your services are either not of criminal origin or are not registered entities of countries your government sternly prohibits its citizens from doing business with.
No matter how juicy the deal, don’t do it until you’ve done in-depth due diligence on the other party.!
See Also: How To Carry Out A Due Diligence Exercise On A Commodity Trading Business
3). The Cash Against Document Scam:
Cash against document is a widely used payment procedure for trading commodities worldwide. Here, the buyer and the seller agree to do business on the terms that the seller would get the goods ready, transport to the port, load onboard the vessel, ship the cargo, and when all shipping documents are ready, they forward them bank to bank and the buyer makes payment.
The problem here is while there are several buyers that would make payment against this, there are much more buyers that would suddenly come up with excuses as to why they have challenges making payment. This is especially dangerous because the Bill of Lading is only released a few days after the cargo has sailed, especially in Nigeria. And as a result, the exporter would have cargo on the sea already en route the buyer’s destination without having collected a penny yet.
The risk inherent in Cash Against Document payment terms is there is no guarantee of payment from the buyer. Just their word and a useless contract. And a word/contract without a guarantee is nothing but water that can easily evaporate under the sun, especially when they’re both in two different countries.
What To Do?
Almost always work with a Letter of Credit blocked for 90 days, as this will guarantee you get paid once the cargo has sailed. You can only work on a Cash Against Document basis with a very well known multinational company that has a strong credit history and reputation for paying its clients.
Another scenario where you can work with a Cash Against Document basis is if you’ve been doing business with a certain company for a very long time and have built a certain level of trust with each other.
But in the end, if you must work with Cash Against Documents because you’re not closing any deals, then request that you’re paid a substantial percentage of the funds as part-payment upon verification and loading of the goods at your warehouse into a container by the buyer. Then you and the buyer can agree on a mutual shipping agent and shipping line to forward the cargo, so that they’re certain it gets shipped. This way, they’d very likely pay the balance.
See Also: How Commodity Trading Works: The Complete Guide To International Trade
4). The LC Verbiage Scam:
While so many international buyers are wary of issuing Letters of Credits to exporters for the fear of it being exploited for one reason or the other, many others are happy to issue Letters of Credit, since it’s not actually a payment but simply a bank payment guarantee.
Sounds nice, isn’t it?
Here’s where it gets dicey.
Out of these buyers willing to issue a Letter of Credit, some of them take the time to hide some terms in the Letter of Credit verbiage, and by doing this, when the exporter submits or tries to submit all required documents, he realises that it’s literally impossible to meet all terms because of some “pretty ridiculous requirements” that have nothing to do with product quality, delivery time, or anything that stops the buyer from getting the product as agreed.
What To Do?
Get a banker with great expertise with in-ward Letters of Credit to review the verbiage of the LC line by line and word for word till every single section is covered, understood, corrected, and reissued right.
If you don’t do this, the very first draft will likely make receiving payments difficult, and many buyers intentionally make it this way so that even after you’ve met all product quality terms and have shipped, they can still decide whether or not to pay you.
See Also: Understanding Letters Of Credit And How To Ensure You Get Paid: The Complete Guide
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I learnt a lot this morning. It’s very insightful. Though I’m not yet into international business but no knowledge is a waste, they say.
Thank you for reading, Geoffrey.
This is very insightful for me. I have always had this thought that international transaction requires huge capital. Thank you
Thank you for reading, Chidi.
International trade doesn’t necessarily require huge capital. There are transactions you can do with $2,000.
The goal of the article was to use large scale examples because that’s what scammers target a lot.
Thank you for the comment.
Comments are closed.