Part of the reasons such frauds have been successful is that Medium Term Notes, Bank Guarantees and Standby Letters of Credit are real financial instruments. A Medium Term Note is the general name given to a debt instrument that matures in the medium term, typically 5-10 years. Bank Guarantees, as they are known outside of the US, or their US counterpart, Standby Letters of Credit, are most often used in interational commerce where a seller might be unsure about a buyer’s ability to pay for goods once received. One way of overcoming this impasse is to utilize a bank guarantee or standby letter of credit.
A SBLC or BG is simply a promise to pay on the part of the bank involved in the transaction. Trading partners often have greater confidence in a transaction if the payment is backed by a commercial bank rather than a trading partner with whom they might be unfamiliar. Banks are not in the business of losing depositors’ money, so in order for them to issue a SBLC or BG in the first place, they would underwrite the SBLC/BG similar to an unsecured loan–meaning obtaining an SBLC/BG is a difficult endeavor to begin with.
Moreover, banks will often charge 1%-8% of the face value of the instrument, meaning a $100 million SBLC could cost the bank’s client as much as $8 million to obtain, and is usually only valid for a period of one year. Which, of course, begs the question: if the borrower has sufficient standing with the bank to be approved for an SBLC/BG and sufficient funds to cover the cost of issuing it, why are they contacting us? The answer is, if this were a legitimate transaction, they wouldn’t be.
Over the years many people have approached us looking for SBLCs/BGs. Most are actually looking to LEASE an SBLC/BG and use the instrument as collateral for a loan or cash investment. This is somewhat akin to leasing a new car and then trying to use the car as collateral for a loan from another lender. No automobile, SBLC, BG or any other leased asset can be used as collateral in a legitimate financial transaction, which is why these transactions never work.