A South African firm applied for a revolving letter of credit in favor of a Germ

Question

A South African firm applied for a revolving letter of credit in favor of a German exporter at a branch of Barclays Bank in Johannesburg. The letter of credit was issued covering shipments of pharmaceuticals and was confirmed by Deutsche Bank in Germany. Shipments proceeded with no problem, growing larger and more frequent. Barclays increased the amount of the letter of credit on several occasions to accommodate the growing business. To Barclays’ knowledge, their account party had always taken possession of the goods and sold them quickly for a profit. Barclays was pleased with their customer’s history and increased their financing. In the last shipment, the largest of all, Deutsche Bank honored the seller’s sight draft for the full amount of the letter of credit and presented the documents to Barclays. While Barclays was inspecting the documents, it learned that the South African buyer had ceased business. In the meantime, Deutsche Bank discovered that the seller has ceased business also. On inspection by Barclays, the cargo containers were found to contain only worthless junk. Investigative reports placed both buyer and seller in Brazil. What happened? What are the rights and liabilities of the advising and confirming bank? How do banks handle problems like this? A South African firm applied for a revolving letter of credit in favor of a German exporter at a branch of Barclays Bank in Johannesburg. The letter of credit was issued covering shipments of pharmaceuticals and was confirmed by Deutsche Bank in Germany. Shipments proceeded with no problem, growing larger and more frequent. Barclays increased the amount of the letter of credit on several occasions to accommodate the growing business. To Barclays’ knowledge, their account party had always taken possession of the goods and sold them quickly for a profit. Barclays was pleased with their customer’s history and increased their financing. In the last shipment, the largest of all, Deutsche Bank honored the seller’s sight draft for the full amount of the letter of credit and presented the documents to Barclays. While Barclays was inspecting the documents, it learned that the South African buyer had ceased business. In the meantime, Deutsche Bank discovered that the seller has ceased business also. On inspection by Barclays, the cargo containers were found to contain only worthless junk. Investigative reports placed both buyer and seller in Brazil. What happened? What are the rights and liabilities of the advising and confirming bank? How do banks handle problems like this?

Explanation / Answer

The South Africa firm applied to Barclays Bank for a letter of credit for the benefit of the German exporter. However, the German exporter shipped worthless rubbish in lieu of pharmaceuticals, so the German exporter involves fraud in the transaction. The rights and liabilities of advising bank are that it tells the seller that the letter of credit is available for obtaining, and offers the service of forwarding the letter of credit to the seller. Its only duty is to make sure that the credit is authentic and precise. The rights and liabilities of confirming bank are that it deals with the certain documents which are required by the letter of credit, such as invoice, bill of lading, insurance, and so forth. It will not pay attention to whether the goods are good or not, and whether the seller ships the right goods. The issuing bank should refuse to pay for the letter of credit due to fraud in the transaction.

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