Circular Letters of Credit

Criminals rotate letters of credit among multiple shell companies and banks, creating a complex chain of trade finance transactions that obscures the audit trail and distances illicit proceeds from their origin.

The core vulnerability lies in the manipulation of letters of credit—a specific trade finance product—to circulate illicit funds in a closed loop. By issuing interlocking letters of credit among shell companies, criminals exploit the fact that each bank sees only one segment of the transaction, allowing them to disguise the absence of genuine trade while layering proceeds.

Shell or front companies are strategically formed in multiple jurisdictions to circumvent sanctions or exploit weaker AML regimes, fragmenting visibility across borders. This cross-border setup further conceals beneficial ownership and complicates oversight, as no single authority can track the entire circular flow.

• Consolidates information on high-risk regions, regulatory environments, and AML/CFT compliance standards.
• Highlights the use of recently formed or front companies in jurisdictions with weaker enforcement or higher corruption risk.
• Flags the unusual involvement of multiple risky locations in circular L/C transactions, raising suspicion of trade misrepresentation.

• Provides detailed information on commercial contracts, invoices, payment terms, invoiced amounts, and descriptions of goods/services.
• Enables the identification of unusual references, such as letters of credit used to back each other, detecting circular collateral arrangements.
• Reveals repeated or inconsistent invoice references across multiple letters of credit, exposing the absence of real underlying trade.

• Presents comprehensive timelines of financial transactions, including timestamps, transaction identifiers, and related accounts.
• Identifies rapid or overlapping issuance of letters of credit, indicating circular movement of funds.
• Pinpoints patterns where sequential letters of credit are used without corresponding underlying trade.

• Contains account ownership details, balances, and full transaction histories for involved entities.
• Enables detection of looping fund flows where amounts ultimately return to the originating accounts.
• Helps confirm the lack of real economic substance by tracking closed-loop structures in multi-party transactions.

• Includes shipping logs, customs declarations, bills of lading, and certificates of origin.
• Verifies the existence and legitimacy of goods or shipments purportedly linked to letters of credit.
• Detects repetitive or non-existent shipping documents, clarifying whether actual trade activity supports the circulation of funds.

• Contains verified identity, ownership, and beneficial ownership data for customers and entities.
• Identifies shell or front companies operating in multiple jurisdictions with questionable business rationale.
• Supports evaluating newly formed or high-risk entities involved in suspicious letters-of-credit transactions.

• Captures transaction amounts, originating and beneficiary institutions, jurisdictions involved, and settlement processes.
• Helps identify chains of letters of credit across multiple banks by tracking cross-border issuance and usage.
• Reveals circular or closed-loop structures when funds revert to the original source under the guise of trade finance.

• Provides official registration details, shareholder information, and corporate histories of entities.
• Confirms whether companies have legitimate business operations or are merely shells used in layered L/C schemes.
• Reveals anomalies in corporate registration and activities, exposing fraudulent participation in letters of credit issuance.

Apply in-depth reviews of all entities involved in circular letters of credit. Verify beneficial owners via corporate registries, cross-check documentation for authentic business operations, and ensure shipping addresses and trade details align with legitimate commercial activity. This specifically exposes shell or front companies used in circular L/C chains that have no verifiable economic substance.

Configure scenario-based transaction alerts to flag rapid or repetitive issuance of letters of credit among the same network of shell companies and banks. Focus on identifying overlapping validity periods, repetitive beneficiaries, and circular fund flows that reveal layering rather than genuine trade.

Screen all involved parties, including ultimate beneficiaries and intermediaries, against sanctions lists, adverse media, and internal watchlists. This tactic specifically targets front companies seeking to bypass financial sanctions by rotating letters of credit through multiple jurisdictions.

Hold letter-of-credit-related funds in escrow until independent confirmation of shipped goods or verified commercial documentation is obtained. By releasing funds only upon validation of real trade activity, financial institutions mitigate the risk of circulating illicit funds without tangible goods.

Cross-check claimed business activities and shipping routes against external databases, trade registries, and publicly available data. By verifying company addresses, phone numbers, and shipping references, institutions can uncover non-existent operations or fabricated shipping details used in circular L/C structures.

Coordinate with other financial institutions and trade finance consortia to exchange intelligence on circular references or repeated letter-of-credit usage. This collective effort helps identify cross-institution patterns and disrupt complex layering schemes hidden by partial visibility at individual banks.

Scrutinize trade finance documentation (e.g., bills of lading, commercial invoices) to verify the genuine movement of goods. Cross-reference shipment data with shipping logs and confirm the existence of cargo. This specifically addresses fraudulent or recycled shipping references in circular L/C setups that lack verifiable merchandise or economic purpose.

• Multiple shell companies open accounts at various financial institutions to receive and disburse funds tied to letters of credit.
• The same illicit funds rotate among these accounts, with each transaction disguised as a settlement of purported trade obligations.
• By using numerous bank accounts in separate institutions, criminals fragment the transaction trail so that no single bank sees the entire circular flow, concealing the scheme’s true nature.

• Criminals establish multiple letters of credit across shell companies, each referencing another with minimal or no real goods behind them.
• Funds circulate through these interlinked letters of credit, making each transaction appear legitimate in isolation while concealing the closed-loop nature.
• This layering technique exploits the fact that each issuing or confirming bank sees only a segment of the transaction chain, reducing scrutiny of the overall fraudulent scheme.

• Criminals forge or manipulate trade documentation (e.g., shipping records, bills of lading, guarantees) to give each letter of credit the appearance of genuine commerce.
• By repeatedly reusing or fabricating supporting paperwork, they bolster the illusion of real trade flows despite no verifiable shipment taking place.
• Banks and intermediaries process these instruments as standard trade finance, thereby approving transfers of illicit funds disguised as legitimate trade transactions.

• Fictitious or inflated invoices back each letter of credit, purporting to reflect genuine receivables for goods or services that never materialize.
• Criminals use these invoices to justify intercompany payments, allowing them to move the same funds in a circular loop.
• Each bank receives seemingly valid invoices supporting the letter-of-credit payment, reinforcing the illusion of legitimate business operations while layering 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.

• Criminals forge or manipulate bills of lading, invoices, and shipping records to legitimize interlocking letters of credit.
• Banks relying on these falsified documents inadvertently validate circular transactions that have little or no actual merchandise behind them.

• Fraudulent or unverified guarantees and related credit instruments within the trade finance framework disguise the source of funds.
• Rapid issuance of multiple trade finance facilities across jurisdictions confuses AML checks, allowing illicit funds to be layered and presented as legitimate trade transactions.

• Establishing shell or front companies in foreign jurisdictions hides the true owners and enables seamless cross-border letter-of-credit operations.
• Distributed incorporation across multiple jurisdictions deters regulatory scrutiny and helps launder funds under the guise of legitimate corporate activities.

Banks are exploited to issue or confirm letters of credit for supposed trade transactions by:

• Evaluating each letter of credit on an isolated basis, unaware that funds are circulating in a closed loop among related shell companies.
• Relying on apparently legitimate documentation, which masks the lack of genuine goods or commercial substance in the overall chain.

Professional money launderers organize the circular letter-of-credit scheme by:

• Setting up or managing shell companies across multiple jurisdictions.
• Coordinating interlocking letters of credit so that each bank sees only a small, seemingly legitimate portion of the transaction.

This layering approach conceals the illicit origin of funds and complicates banks’ due diligence, as each letter of credit appears valid when viewed in isolation.

Beneficial owners remain concealed behind shell or front companies by:

• Leveraging circular letters of credit to layer illicit funds without disclosing their true identities.
• Circumventing sanctions or other compliance checks through opaque corporate registrations and falsified trade documentation.

Document forgers support the scheme by:

• Altering or fabricating trade documentation, such as bills of lading, invoices, and shipping records, to validate each letter of credit.
• Presenting plausible but false paperwork, enabling criminals to bypass financial institution checks on underlying commercial activity.

Shell or front companies are established across multiple jurisdictions to:

• Open letters of credit referencing each other, creating the illusion of legitimate trade.
• Hide genuine ownership and operational details, making it difficult for banks to ascertain the economic reality behind the alleged transactions.