SOME USEFUL TIPS and PREVENTION - extracted and updated from a fellow supplier web site .. a little old, but still useful.
Most cases of fraud, not only in the sugar business, are only successful because the buyer allows it to happen. Often this comes down to pure greed on the part of the buyer. Fraudsters are always on the look-out for the buyers who think they are the smartest, because they are the ones most likely to be attracted to a 'bargain offer', by words like 'unbelievable but true', or 'cancelled order, ship on the high seas'.
Frauds normally will involve the following:
1. LOOK FOR THE CHEAPEST PRICE
2. PAY BY 'STANDBY LETTER OF CREDIT'
3. PAY BY "PRIME BANK GUARANTEE"
4. ISSUE A OPERATIVE LETTER OF CREDIT WITHOUT ASKING FOR
THE PERFORMANCE BOND AND CHECKING SUPPLIER PAST SHIPMENT RECORDS
5. DON'T BOTHER TO ASK YOUR SUPPLIER TO SEND YOU PROOF OF PAST SHIPMENTS AND VERIFY THESE SHIPMENTS BY CALLING THE SHIPPING LINES AND INSPECTION COMPANY DIRECTLY.
6. DON'T BOTHER MEETING THE SELLER
7. DON'T SHOW YOUR LAWYER OR ATTORNEY THE CONTRACT.
8. DON'T ASK YOUR BANK FOR ADVICE.
9. DID NOT DO DUE DILIGENCE ON SELLER
10. DID NOT ASK FOR PAST SHIPPING RECORDS AND PAST SGS REPORTS AND VERIFY THE INFORMATION WITH SHIPPING LINES.
Sugar refineries are in business to make money, and do not need to sell their product below the market price. Much sugar is sold world wide through trading companies who buy from refiners and sell through financial markets such as the UK LIFFE ( for refined sugar) and the USA ICE ( for raw VHP). These prices are public knowledge and are published in newspapers, on teletext, and on the Internet. To be added to these prices are the distribution, handling, shipping and insurance costs, as well as the profit margins of the parties involved in the whole process. Any of the large, well know refiners, producers or traders such as UK's Tate and Lyle will happily quote a price to a buyer who is financially able.
Apart from this visible market, there are also sugar refiners who sell directly to trading companies such as Hatton Group Limited, who are able to sell at lower prices simply because they have lower overheads, contract to take a large amount in a given period, and work on lower margins than the stock exchange quoted majors.
However, the price difference between the two markets ('primary' and 'secondary') is not as large as a casual browser of the Internet sites would think, perhaps 20 -30 USD per tonne at most, depending on the size of the contract and delivery point.
The Standby Letter of Credit - Uses and Abuses
A Standby Letter of Credit is sometimes used in place of a bank guarantee of payment, particularly by American banks. The true purpose of this financial instrument is to provide protection for a Seller should the Buyer fail to pay for his goods at the agreed time. If, for example, an exporter of computer monitors agrees to ship every month 10 containers to his customer in Australia, and the Buyer agrees to pay by electronic means on the 10th day of the month following delivery, the Standby L/C is put in place by the Buyer's bank, and would here probably be equal to the amount due by the Buyer in a two month period. The terms of the L/C will permit the Seller to make a statement to his bank confirming that payment has not been received within the agreed time, and the issuing bank must pay the sums due to the Seller.
The security to be provided by the Buyer to his bank is agreed between them, and can be between 2 and 3 months worth of the amount of goods expected to be shipped and purchased.
Banks would only in very very exceptional circumstances ask for a guarantee of payment from their clients covering one full year!!
A more usual payment instrument is the Letter of Credit. This is used particularly in the sugar business when a Buyer wishes to fix a price valid for say one year, and the Seller makes a commitment to supply at that fixed price. Because the Seller has in turn made a commitment either to his own refineries or to the supplying refineries to purchase for one year, the Buyer has to ask his bank to guarantee that the L/C will in fact revolve every month / shipment until the end of the contract. The costs and the securities required for this commitment by the Buyer's bank are a matter for negotiation for the Buyer and his bank. The guarantee given by the bank is however part of the L/C text, and is NOT A BANK GUARANTEE, i.e. is not a separate negotiable instrument, and cannot be discounted in any way. The Seller is not interested in what this guarantee costs the Buyer, since it has no effect on him whatsoever.
'Fully Funded L/C'
This is another one of these fantasy names which belong in the same category as the above, usually for fraud.
THE CROOKS, 'SLC', 'PBG'......
Scenario (1): Seller offers sugar at USD250 CIF for 100,000 tonnes over 8 months. Seller asks for a 'SLC' or 'PBG' covering the whole amount, claims it has to be that way in case Buyer defaults. Seller offers to post his Performance Bond before the L/C is opened, and it is to become effective after the 'SLC' or 'PBG' has been irrevocably issued. Buyer issues SLC, Seller uses the security of the 'SLC' which is now open in his favour, and does in fact activate the P/B. Buyer goes to shady bank in off-shore haven, and sells (discounts) the SLC for 70% or more of it's value. No sugar is supplied. After eight months bank presents SLC to Buyer's bank and receives payment. Buyer loses his money and tries to find Seller who has long since gone off to the Seychelles or other country with no extradition treaty.
Scenario (2): As above, except Buyer's bank makes payment conditional on sight of Bills of lading, or other documents - Seller produces forged documents and claims for the first vessel, say 25,000 tonnes (USD6,250,000). Buyer has to pay his bank, tries to find seller as above...
Scenario (3): Greed again - the story for the sophisticated Buyer: Seller tells Buyer he will use the SLC to invest in a HIGH YIELD PROGRAM, and will make so much money that he can sell the sugar for, yes, special offer, USD 85 per metric tonne CIF ASWP !!
Wow! Who could resist? Yes sir, to any port in the world, from Murmansk to Taipei to Luanda.
The rest of the story as above......
Now of course any half intelligent person who has the money to open an irrevocable bank guarantee with no conditions attached for 8 months will not bother with sugar if he can make so much from a 'program'. If 'programs' exist, why doesn't he pop down to his local bank and ask? Or call up the Federal Reserve and ask them? AH, but it is secret Sir, and you have to be in the sugar business to take part - or some such story. A fool and his money are easy parted, as they say.
So a word for sugar Buyers:
1. NEVER sign a contract where payment is by irrevocable 'SLC' or 'PBG'
2. NEVER issue an operative LC , i.e. the Seller should post PB and past performance to activate the L/C
3. ALWAYS ask your bank to get confirmation with bank responsibility from the Seller's bank that the seller is genuine and can supply the sugar.
4. ALWAYS get your lawyer / attorney to check everything before signing.
5. ALWAYS inform yourself as to the real current costs by asking friends and
competitors, or even reading the newspaper.