SBLC risks for beneficiaries

[filmlaw]

A client has been approached by a broker offering a loan secured through monetization of a SBLC (issuing bank is Barclays or HSBC, receiving bank must have relationship with client/borrower). While I understand there are many disreputable brokers seeking investors to the "backend" of this type of transaction and offering excessive returns, if there is no fee payable and no deposit funds required up front for a borrower/beneficiary, what risk is faced in going through the process of setting up the transaction, other than time spent? There have been some flags in reviewing the documentation over different iterations over the last several months but the broker appears reputable. Appreciate insights offered.

[Sapphire Capital]

lol, first the loan secured through monetization of sblc's are mostly scams. There are few ways to handle them but frankly: a. you have to have a loan agreement or a credit line stipulating a specific collateral. b. the sblc is issued by a bank, send and verified by the receiving bank. c. the issuing bank does this for a client who has satisfactory collateral and does more or less underwrite the borrowers obligation towards his lending bank. He does that for a fee, because the bank issuing the sblc will have to pay when called on the event. Usual message from the lending bank is pay or extend.
However you will find that the sblc issued will not be paid because frankly it is not defacto structured for the underwriting of the debt. Sometimes you find that if the verification is followed up as common that it is coming back as fraud. But some of those instruments show how to verify and if you follow their procedure you also get a fake verification. If the sblc is completely verified and all agreed to between the banks the next question is who pays for it because the actual collateral holder behind the issuing bank will not do for nothing. If he does there is usually a because it could be a money laundering operation, yes there are those and yes a lending bank will be sensitive to it and look for the underlying documents.
There is also a tax question: Is it a free gift if the sblc is not paid for? If the sblc pays and there is no recourse is it income?
A lot of details and it all depends on details.

[congregatio]

Lets do the basic of a real transaction:
1. contract between bank as lender and client as borrower, contract says loan against collateral, collateral be specific rated sblc
2. contract between principal and bank (issueing bank) for collateral , payment and issuance of sblc
3. contract between borrower and brokers and principal for the sblc to be send from issuing bank to lending bank
4. lending bank gives commitment letter
5. issueing bank gives principal the commitment letter
6. principal pays the fees and makes collateral available for the issuing bank to issue sblc
7. sblc is preadvised to lending bank
8. lending bank verifies and issuing bank issues sblc, lending bank reconfirms and reverifies sblc
9. lending bank releases loan to borrower
10. borrower has to pay principal for the sblc according to contract
11. borrower has to pay loan back at term and make interest payments, if he doesn't lending bank calls for payment of sblc, issuing bank pays, claim of lender against borrower is transfered to principal

if the borrower does not pay the principal or there is no fee than you have a below market cost handling, defacto a gift ; if the sblc does not pay upon demand than the lending bank is defrauded because the error of good collateral was used to gain the loan release payment. that also applies if the borrower pays the loan. If the borrower does not than its a complete loss.

if it is a money laundering transaction than the funds securing the sblc issuing are cashed when the sblc is paid, the loan paid to the borrower is repaid and the lender not out of money, but in fact he is part of a money laundering operation without knowing, the borrower has the money minus fees, all looks easy, origin of funds of the borrowers money is easy, he can show release and commitment from lender. Since banks have been experiencing this they will want to see all details.

This makes it difficult to have banks agree to be a party of those transactions. However done right they can be very profitable.

[filmlaw]

Thanks very much for these replies, gents.

The broker's information sheet provides that 1) the group they represent has the collateral against which their bank will issue an SBLC (previously stated to be an SKR for gold verified by G4S); 2) my client is responsible for bringing the banking relationship with the lending bank who will take the SBLC as security; 3) the lending bank will monetize at between 80-95% with the broker's group being the borrower; and 4) my client will receive 50% of loan proceeds for its own project while 50% is available to the broker's group, presumably for financial instrument trading purposes/treasury function, etc. My client's project will be monitored by a Big 4 accounting firm. The broker's group will receive an equity share of my client's project. There are no advance fees or money down. If the SBLC is called, this group becomes lender of record vis a vis loan portion my client receives.

Agreed re your notes on AML. We are told all KYC/AML is satisfied prior to SWIFT documents being sent, again per their sell sheet.

The flags: A) There appear to be other brokers with the same offer in the marketplace, and they don't appear to be very sophisticated individuals. Identical wording. The broker who brought this to my client was known to another of my client's advisors and has had a legit career in finance according to that person.

B) The "gold SKR" raised flags as at first we were told the gold was in the vaults of a European central bank and it seemed odd to me that a central bank would have such a vault account for HNW person, no matter who or how UHNW.

C) Since we were first approached the deal has shifted, always in an effort to make it "easier" and with the shift, the bank names have also changed, first it was a big multi-jurisdictional institution in the same country as the central bank that held the gold (not UK, Swiss or Germany), then it's one or two named top 20 banks out of London or New York.

D) Why go to the bother of putting the lending bank into the picture, and why do they need an introduction to our bank even so? If the collateral is there, surely any bank would lend against it? At the size they are discussing there would be very healthy fees and meaningful impact to balance sheet.

Excellent point re tax consequences of transaction being construed as a gift.

Thanks again.

[Sapphire Capital]

fast and straight: This bears all the hallmarks of a scam and handling via brokers who have no idea what they are doing. I am sure one of the members will tell you the details

[congregatio]

these offers are always banded around by brokers that do not understand their business, also called gray market brokers, they have no professional experience, no degree, no schooling and often do not understand basis points to just mention one of many things.
Avoid anything brokerchain, while thee are people who have a man of affairs, real principals never allow two to run around. In the days of the fax machine these things went from broker fax to broker fax, each broker playing to the other that they are principals to find where the offer originates. Never works, some try to flip the sblc and cann't do it because it requires things they do not have, money and knowledge and a bank relationship.

a gold skr ;-) a good laugh, first check who the issuer is if you get a copy, mostly they just talk about it. While there are people who use precious metals to take over credit risks through an sblc and are handsomely paid for it, please understand:
If you use precious metal to get an sblc issued the sblc is a credit or loan and has reserve requirements. Those reserve requirements fall away if you use as collateral either precious metal or government debt which is investment grade. The later only works in the country of the issuer. This makes a loan/sblc covered by precious metals cheaper since the calculation does not need to look at reserve requirement.
However if you use a secondary collateral, meaning the skr not the precious metal itself, or only obligations for precious metal, then the sblc issuer has reserve requirements and the fees are higher.

precious metal skr's are banded around a lot, very few are real. some of those are pretty nice looking and old, unfortunately they are usually older than the color of the paper they are printed on. Gold is owned two different ways generally, you either buy the gold physically, meaning every bar has a number, certificate, assayer report etc, and you have an ownership of specific bars, or you have a right to bars, meaning you own an obligation of the bank and they can deliver you gold bars of any kind , you can not demand a specific bar identified by number etc.

Central Banks usually do not have accounts of private individuals, but some do, usually those are companies or individuals who have more money than banks. However Central Banks do not engage private transactions usually.

Shifting banks around is a very common sign of fraud

Your argument is right and yes the principals bank could lend directly. However some banks will not do it or the origin of the funds has to be covered, thats very seldom a good sign. However if the borrower is in the US it can be an argument because frankly US banks are the pits when it comes to special structures, its not that they are unable to do but the compartmentalization is so high and the education of bankers so bad that its difficult to use them. Sure if you talk to a structured finance team they will understand the esoterics of asset backed structures.

Now an expense of 50% is certainly rich, given that the current federal or european lending rates are very low, no one in his right mind will do this. Goldman Sachs is happy with 25 to 50 basis points, thats 1/4 to 1/2 percent, you are in very high risk territory.

Now you mention financial instrument trading purposes/treasury that leads you to the point: trading programs
Trading programs are easy identified as arbitrage trading where QIB's (qualified institutional buyers = minimum 100 M USD in liquid available assets) buy and sell participations in syndicated loans and such parts and pieces are sblc's or other debt paper. The trading is at high volume and depending on the risk the spread can be high. The holy grail is to find a sucker who takes a high risk loan in the form of an sblc of your hand and uses it to secure a loan paying you more money than anyone else. Since the players in that game know each other it happens almost never, but brokers still dream about it. There are also brokers who do not understand and try to make money by taking fees and charges etc.
Do not misunderstand me, those structures can work but they are complicated and risky, not many handle them and frankly they are not free. While they often use brokers the fee volume for those is seldom more than 1 to max 5%.

In addition those brokers often needs a license for this business and do not have one.

[lairezippert]

very true Richard, remember when you rescued us from a scam, since then I learned to avoid them

[alanbond]

Filmlaw, what you describe is the usual scam, its either an advance fee scam or someone is trying to find a taker for some fake paper and burn you. What Richard doesn't say is that banks you talk to about this will always tell you not to go there. Its a high level corporate structured finance game and if you are a QIB you don't need the brokers, the deals usually come to you. While Richard has the experience, knowledge and ability to handle those as a specialized counsel, I have seen as a banker people who try and loose everything, always complaining about us evil banksters. Be careful.

[filmlaw]

This is all very helpful, to each of you thank you for the insight your experience has afforded you.

Reading it all together supports my own conjectures: I think that the broker isn't as sophisticated as he may otherwise seem, is near or past retirement and looking for a "home run", hasn't done his own diligence and may be a dupe as much as any potential client is, that someone in the chain sees an opportunity not in a deposit or fee up front but in some other richer opportunity to burn another somewhere else in the chain ... fishing with live bait is the best analogy I can think of, and repercussions may come back on the others. Registrations in Nevis, a "you don't get to know who anyone is because it's all necessarily confidential" attitude, and huge sums verified by named institutions (G4S, PWC, HSBC) can be read as sophisticated by the naive or naive by the sophisticated. It's all too clever by half.

(the central bank was Italy by the way)

much appreciated ... happy to help with legit film queries if anyone ever has any, there be sharks in those waters too ;-)

[congregatio]

could you explain a bit what you do with examples (anonymous) how you handled files, please use a separate posting, it may be interesting for the members

[anenro]

Jan 28, 2021 6:06:37 GMT 4 Sapphire Capital said:

fast and straight: This bears all the hallmarks of a scam and handling via brokers who have no idea what they are doing. I am sure one of the members will tell you the details

I fully agree with your comment.  The whole thing is full of red flags, it resembles a "Chinese parade"..

[anenro]

The SBLC was issued based on an SKR for gold? So, a "lender" instead of issuing a line of credit, based on cash deposits" decided to issue the line of credit using a standby letter of credit? Aren't SBLC issued for a specific purpose and not just a blank check? Am I reading this all wrong?

SBLC in need of hypothecation (monetization) = a waste of time and efforts. Now days, there are SOME traders offering "trades without the need to move the investor's funds." I would look into it.