A financial instrument issued by banks guaranteeing the fulfillment of a buyer's payment obligations to a seller upon meeting agreed-upon terms and conditions. If the buyer is unable to make the payment, the bank covers the outstanding amount. Commonly used in international trade to mitigate risk and ensure timely payment.
Main/
Letters of Credit
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Code
PS0031
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Name
Letters of Credit
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Version
1.0
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Category
Trade Finance & Commerce Enablement
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Created
2025-02-26
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Modified
2025-04-02
Related Techniques
- Over- or under-invoicing goods allows criminals to manipulate the amount drawn under the letter of credit.
- Submission of falsified invoices and shipping records to the issuing or advising bank conceals the true value of transactions.
- By submitting the same invoice or shipping records to different banks, criminals can secure multiple letters of credit for a single shipment.
- Repeated issuances of letters of credit for one set of goods obscure the money trail and enable compounding illicit proceeds.
- Inflated pricing in letters of credit documentation compels banks to honor payments exceeding the genuine value of goods.
- Criminals launder the surplus as legitimate trade proceeds once the letter of credit is settled.
- Through misrepresented invoices or shipping documents, criminals trigger payment guarantees for fictitiously valued goods, embedding illicit proceeds within seemingly legitimate trade settlements.
- This scheme leverages the documentary focus of letter-of-credit processes, where banks primarily verify paperwork rather than physically inspecting goods.
- Criminals submit altered or forged settlement documents to banks, triggering letters of credit for transactions with artificial or non-existent trades.
- The bank’s reliance on paper or electronic forms of documentation rather than physical verification creates a loophole for disguising illicit proceeds.
- Criminals may store precious metals or gemstones in rented safe deposit boxes, isolating them from standard banking oversight.
- This physical separation hinders detection and traceability, enabling illicit assets to remain off traditional transaction records.
- Enforcing stricter KYC for box rentals, periodic checks, and investigating red flags in customers’ risk profiles help mitigate abuse.
- By presenting forged shipping and customs documents, criminals secure letters of credit for diamond transactions at inflated amounts.
- The guaranteed payment structure of letters of credit helps criminals validate large, seemingly legitimate trades while concealing the true source of funds.
- Illicit actors manipulate bills of lading and related papers to meet documentary requirements for payment, even when goods are fake or grossly overstated.
- The issuing bank may release funds upon reviewing these forged documents, unwittingly facilitating money laundering.
- Fraudulent or inflated claims under letters of credit enable criminals to secure bank-guaranteed payments for phantom shipments.
- By forging bills of lading and related paperwork, they collect funds when no actual goods or services are exchanged.
- Fraudsters present fabricated or altered bills of lading to fulfill the documentary requirements of a letter of credit, triggering the bank’s payment despite no real shipment.
- Reusing or multiplying the same false shipping documents can inflate transaction values, further obscuring illicit proceeds.
- Criminals create interlocking letters of credit among shell companies, each referencing another, to circulate illicit funds under supposed trade transactions.
- Every involved bank perceives an apparently legitimate letter of credit, masking the absence of real goods or economic substance and enabling seamless layering of proceeds.
- Fraudulent or manipulated letters of credit are used to release payments for non-existent or overvalued goods.
- Offenders submit bogus shipping documents, triggering banks to honor payment without any genuine underlying trade.
- Criminals exploit red/green clause letters of credit by inflating invoices and staging fictitious shipments, triggering partial or advance payments that can be diverted for illicit purposes.
- The bank’s guarantee of payment—once the (often falsified) shipping or production documentation is presented—allows offenders to layer illicit proceeds under a veneer of legitimate trade finance.
- By routing these advanced funds through multiple intermediaries or shell entities, they obscure the origin and trail of the illicit capital.
- Criminals manipulate letter of credit terms, over-invoicing goods or providing fraudulent shipping evidences to trigger guaranteed payments.
- This tactic conceals the true nature or value of transactions, enabling illicit proceeds to cross borders under the pretext of legitimate trade.
- Fraudsters inflate invoice amounts or falsify shipping details in letters of credit, allowing them to move illicit proceeds under pretense of legitimate trade.
- The bank’s payment guarantee is triggered by doctored or misleading transport documents, concealing the true nature or value of goods.
- Repeated amendments to letters of credit mask last-minute changes in commodity type or quantity without valid commercial reasons.
- Multiple letters of credit for the same shipment create confusion and reduce effective due diligence.
- Criminals can forge or alter reference numbers, shipment details, or beneficiary information to create inflated or fictitious transactions.
- By tampering with key data points, they exploit the reliance on these instruments for trade settlement and obscure the actual flow of illicit funds.
- Facilitate international trade payments that can be manipulated to conceal sanctioned parties by falsifying documents.
- Structured LC arrangements obscure the true origin or destination of goods tied to restricted entities.
- Enable criminals to finance purchases or sales of counterfeit goods under the guise of legitimate trade deals.
- Fraudulent or superficial documentation can satisfy bank requirements, facilitating disbursements that appear legitimate, thus laundering proceeds derived from counterfeit merchandise.
- Arms traffickers may present seemingly valid trade paperwork for legitimate goods while actually shipping weaponry.
- The bank’s obligation to pay upon confirming documents can be exploited if compliance checks fail to detect the concealed arms.
- Fraudulent shipping or ownership documents are submitted to trigger letter-of-credit payments, masking the illicit origin of proceeds.
- Criminals inflate or misrepresent goods (e.g., volumes of timber) to launder funds by creating the appearance of legitimate international trade.
- Overstated shipping documents ensure the letter of credit disburses payments exceeding the true value of goods, generating illicit proceeds.
- This process masks inflated transactions as legitimate trade payments, complicating AML scrutiny.