How to identify an SBLC scam
By Boo Kok Chuon
Over the past one year, we have advised and saved no lesser than five clients, who almost fell victim in financing schemes related to SBLC that turned out to be fraudulent in nature. Over the past one week, we received an enquiry from a long-time friend and client with regards to an ‘irresistible’ financing offer through SBLCs. Within minutes of our analysis and discussions based on the available documents, we uncovered the conspiracy behind the offer. That gave us the idea, that perhaps it is time that we share our experience in the public domain, before more individuals fall victim to such financial scams.
SBLC: What is it?
To the non-financially trained individuals, fancy financial jargons such as SBLC, LC, MT760, MT199, BG etc often serve as a facade in painting a false picture of sophistication to the underlying conspiracies. In actual fact, a quick search on Google will reveal that these are indeed legitimate financial instruments that banks provide. To the eyes of the non-financially savvy, the complexity and technicalities as described in online literatures further add on to its mystique, that are often exploited by con-artists in their portrayal of exclusivity and prestige in their narratives. In actual fact, though unequivocally, the legitimate use of these instruments indeed exists in practice, however, most of the opportunities readily available to any common businessman on the street are frequently fraudulent in nature.
SBLC is the acronym for Stand-By Letter of Credit. To put it in layman terms, it is in general, an instrument for wealthy individuals to ‘transfer’ or ‘loan’ their credit limits with their banks, to another third-party. In return, there frequently involves other forms of incentives that comes along with the deal. One example would be, for instance, an owner of a public listed company taking interest in investing in a property development project. Whilst most of his wealth are locked in the shares of his public company, he faces problem cashing out if he wants to seize the investment opportunity in the project. What he can do then, is to encumber, or pledge, his shares to the bank, and procure a guarantee in the form of an SBLC. With the SBLC instrument backed by the bank, he can then transfer it to the company which he intends to invest in, where the company would then be able to use this SBLC to procure a loan from the company’s own banker. Almost certainly, the investor thereafter will receive considerations in the form of vested interests in the project, and/or monetary compensation for lending his credit limit to the company. These returns are often minimally equitable, otherwise it would make little sense for these wealthy individuals to part with their monies for unnecessary risks. These deals typically involve a full suite of investment documentations and undertakings, from term sheets to the investment agreement and the financial instruments that the investor procure in return, and rounds of negotiations and redlining between parties and their respective solicitors and advisors. Often than not, much attention will be paid to safeguarding the interests of parties in this process, and it is certainly never a straight-forward and easy feat. Therefore, if anyone come across a deal claiming that the funds can be cleared within a matter of days, chances are it probably is a scam.
Typical Narrative
Most of the cases that we handle often follow a similar narrative:
It starts with an introducer, who can be your friend whom you have lost contact with for a while, or a business acquaintance whom you got to know at some networking event and has been exploring with you on some other collaborations that are totally unrelated to the SBLC scheme. More often than not, the initial “business collaborations” usually only serve as a red-herring to reduce your defence, and subsequently, the SBLC will be brought in on a ‘by-the-way’ basis. One common characteristic of such introducers is, they are probably not residing in your local community. Therefore, in any case, they are prepared to flee if any issue crops up.
Once you are led into the conversation on SBLC, the introducer will start bombarding you with documents and evidence to back the legitimacy of the offer that he is providing to you. He will portray an image that this opportunity is extremely exclusive, as his client (who is the wealthy individual) only trust recommendations from him, and he is only offering it to you because of your rapport with him and your project has good prospects. Initially, most of us will think that it is too good to be true, and begin to feel skeptical. These deals typically involves tens of millions, or even hundreds of millions of dollar, no doubt it is too good to be true, but you would want it to be true as you could become a multi-millionaire overnight. So you will start to find yourself struggling between your objectivity and the emotion that desire for the money. Obviously, most of our clients retained some objectivity, and that was when they started calling us up to seek our advise in the transactions.
When we took over, we conduct due diligence and forensic investigations on the documents given to our clients by the introducer, while continue to represent our clients in the negotiations and communications process with the introducer. We typically will probe on the deal and payment structure, and where ambiguity arises, we will get to the bottom of the arrangements and corner the introducer to commit. In that respect, it allows us to map out the whole model behind the introducer’s scheme, thereby allowing us to identify the red flags and possible intentions behind the whole setup.
Common Red Flags
In most of the cases that we handled, we normally do not pass the allegations that the deal is a fraud. Instead, we highlight “red flags” that we identified in our forensic financial investigations and due diligence processes, and we leave it to our clients to draw their own conclusions and decisions. The following is a non-exhaustive list of some of the common red flags that we came across in our practice:
- Sharing of confidential information “sample information” with you casually
- Images of unclear identification documents of the counter parties
- Doctored identification documents
- Fake email addresses and contact numbers in the sample documents
- Bogus sample company
- Up front payment requirements
Conclusion
There are more to it, but out of those listed above, in our experience, the requirement for upfront payments is almost certainly a sure-fire way to determine that the deal is a scam. These ‘upfront payments’ could be in the form of introducer fees, administrative fees, bank charges, solicitor fees etc. A general rule that we apply is, as long as upfront payment is required before the proceeds are released and received by the company in good order, then we consider that as a major red flag and our opinions to our clients would always be ‘caveat emptor’. It is always good to seek professional advice when you come across a deal that sounds too good to be true. That being said, usually such an offer is indeed a deal that is too good to be true.
The author is an experienced corporate finance professional, entrepreneur and author of the book “Corporate Directions: A Comprehensive Guide for Directors of SMEs in Singapore”.