Fraudulent bills hit stormy seas
5 May 1998
7 May 1999
19 July 1999
An Appeal Court ruling clarifies exposure to risk when dealing with letters of credit transactions, writes Roger Masefield. Roger Masefield is a tenant of Brick Court Chambers.
1 May 2000
10 August 1996
7 July 2008
Roger Pearson looks at a High Court decision that highlights the use of ante-dated and false bills of lading to secure bank credit
A blow has been struck against those who use ante-dated and false bills of lading in international trade in order to satisfy the requirements of letters of credit, or to assist those who need to do so.
In a High Court decision, Mr Justice Cresswell enforced the need for accurate documentation. He said honest commerce requires that those who put bills of lading into circulation only to do so where they know they represent the true facts.
He ruled that the Standard Chartered Bank (SCB) was entitled to damages from the Pakistan National Shipping Corp- oration (PNSC), Seaways Maritime and Avind Mehra, a director of Oakprime International, which is now in liquidation.
Attacking the practice, the judge said: "Ante-dated and false bills of lading are a cancer in international trade."
Lovell White Durrant, which handled the successful litigation on behalf of the SCB, says the case is a warning to those involved in the creation of such documents - and not just the beneficiaries who present them to confirming banks in the UK.
SCB had sued PNSC, Seaways and Mehra in respect of losses it claims were incurred as a result of making a payment to Oakprime/Mehra, the beneficiary under the letter of credit, in reliance on a set of documents which included an ante-dated bill of lading.
SCB failed to obtain reimbursement from the issuing bank because it quickly became clear that the transaction was fraudulent.
Ruling that SCB was entitled to damages, to be assessed later, the judge ruled that each party should bear a third of the blame. He held Mehra liable for Oakprime's involvement.
The case centred on a consignment of Iranian bitumen sold by Oakprime to a company in Vietnam.
Payment for the goods was to be made by a letter of credit for the sum of US$2.94m, opened by Incombank in Vietnam in favour of Oakprime and confirmed in London by SCB.
The letter stated that the last date for shipment was 25 October 1993. But by that date only a proportion of the cargo had been loaded. In order to satisfy the terms of the credit letter and to ensure that they would each be paid (PNSC for freight, Seaways for commission and Mehra for the goods), the three companies agreed to issue falsely dated bills of lading.
Alastair Smith, a member of Lovell's international trade and trade finance group, says that at least until the adoption of more sophisticated mechanisms, such as electronic billing, banks will continue to be exposed to this kind of fraud because they are not required by Uniform Customs & Practice to look behind documents.
In addition, to do so would be impossible in practical terms due to the volume of transactions being processed.
He says that while the documents satisfy the terms of the letter of credit and are not obviously fraudulent, banks will accept them.
But although there is little a bank can do to protect itself against sophisticated fraud of this kind, Smith says some comfort can be taken from the fact that the measure of damages recoverable in a claim for fraud is much wider than the test which is applicable to other tortious claims.
It also includes all the loss directly caused by entering into the transaction (that is, effecting payment to the beneficiary), whether or not it was foreseeable, and including consequential loss.
Smith says that, conversely, those who participate in the production and presentation of fraudulent bills of lading may well face a liability for damages which is far in excess of the value of the underlying transaction and which can include those costs the bank may incur if it has to take possession of the underlying cargo and negotiate a sale to another party.
This is, of course, aside from the effect of being on the receiving end of a fraud judgment.
While this may not deter small export/import operators from trying to procure or present false documents, it should be of some concern to those other parties such as shipowners and their brokers and agents whose assistance will be required.