SBLCs or BGs for Monetisation -How the scam works

A purported “Monetization Request” advertises the provision of either a bank guarantee or a standby letter of credit—meticulously customised to the requisite verbiage—for sums reaching several billion, ostensibly secured by tangible cash held in the accounts of Sumitomo Japan or other esteemed institutions. These instruments are proffered as one-year facilities, with an automatic renewal clause extending their validity for up to a decade. 

The document alludes to a previous Sumitomo-backed transaction intended to underwrite major projects across Japan and China—from cutting-edge hospitals to a prominent cultural centre. It is emphasised that such guarantees or SBLCs are inherently project-specific, with bespoke wording that precludes arbitrary reissuance. Furthermore, the proposal asserts that, in accordance with internal protocols, the instruments are issued in “hard copy” to obviate the delays intrinsic to SWIFT transfers for foreign transactions. 

The prescribed process involves the submission of a proposal, subsequent due diligence, and ultimately the receipt of a hard copy instrument dispatched via “secure email and bank courier”, with a portion of the funds returned to the issuing “institution”. This reliance on antiquated hard copy procedures and ambiguous financial terminology unmistakably raises significant concerns. 

In very simple terms, here is how such a scam typically operates: 

1. Fake Document Creation: 

The scammer produces a fake bank guarantee or SBLC—a type of promise from a bank that looks official and is laden with complex legal wording. They assert that this document is backed by real, hard cash in an actual bank account, even though in reality no such funds exist.

2. Attractive Promises: 

The scammer claims that, with the right wording, this document can be “monetized.” In other words, they suggest you can use it to unlock or secure a huge amount of money for a project. The proposal often includes details like a very large sum (for example, up to several billion), making it sound extremely lucrative. 

3. Process and Urgency: 
They outline a seemingly efficient process—issuing the document quickly (sometimes within 24 hours) and sending a hard copy by bank courier. This urgency and the mix of digital and physical delivery are intended to give the impression of legitimacy and reliability. 

4. The Hook: 
Once you are convinced by the impressive language and the reputation of the bank name mentioned (such as Sumitomo), you may be asked to pay fees, provide collateral, or commit funds in some way. The idea is to make you believe that you’re on the verge of receiving a very valuable financial instrument. 

5. The Unravelling: 
Eventually, when you try to verify the document with the bank or use it as collateral, you discover that it is not genuine. The funds were never there, and the instrument was a fabrication designed solely to trick you into parting with your money. 
 
In summary, the scam exploits the allure of a sophisticated financial instrument and the trust people place in reputable bank names. It uses complicated and impressive language to disguise the fact that the document is fraudulent, leading victims to make payments or decisions based on false promises of easy monetization. 
This explanation lays out the scam in straightforward terms, highlighting how the attractive promises and misleading documentation work together to deceive the victim. 

In detail

1. Ambiguity in Instrument Classification

Bank Guarantee vs. SBLC:

The proposal asserts that a Bank Guarantee and an SBLC are “basically the same instrument.” In reality, while both instruments serve as credit enhancement tools, they possess distinct legal and operational nuances. A Bank Guarantee typically represents a contingent liability, whereas a Standby Letter of Credit (SBLC) often functions as an independent payment undertaking. This conflation could lead to misinterpretation of obligations, affecting both legal enforceability and risk assessment.

Verbiage Flexibility:

Allowing the instrument to be tailored to the monetizer’s desired verbiage—albeit within banking protocols—introduces the possibility of non-standard or ambiguous clauses. Deviations from established language could impair the instrument’s clarity, legal validity, and may even contravene regulatory requirements.

2. Financial Underpinnings and Funding Assertions

“Hard Cash Backed” versus Credit Lines:

The proposal emphasises that up to 1.3 billion euros are supported by “actual hard cash backed accounts” as opposed to credit lines. This description is inherently ambiguous. The notion of “hard cash backing” is non-standard in modern banking parlance, which typically relies on electronically maintained reserves and audited liquidity. Such language may raise concerns over the veracity of the backing funds, potentially undermining confidence among regulators and counterparties.

Regulatory and Audit Trail Issues:

The absence of a traditional credit line may imply that funds are segregated in a non-standard or opaque manner. This could complicate both internal and external audits, as well as raise issues with respect to capital adequacy and liquidity regulations imposed by financial authorities.

3. Temporal and Renewal Provisions

Fixed Term with Automatic Renewal:

The instruments are described as one-year facilities that automatically renew for up to 10 years. Such a long duration—coupled with automatic renewal—introduces several risks:

• Regulatory Changes: Banking regulations and international financial standards are subject to evolution; an instrument drafted under current protocols may not remain compliant over an extended period.
• Market Conditions: Fluctuations in market conditions over a decade could render the fixed terms either economically unviable or disproportionately risky.
• Contractual Ambiguity: Automatic renewals necessitate clear-cut conditions for termination or renegotiation. Without stringent safeguards, the parties could find themselves locked into unfavourable terms.

4. Issuing Bank and Geographic Concerns

Use of Sumitomo Japan (Tokyo):

While Sumitomo is a reputable institution, specifying a particular branch raises several issues:

• Jurisdictional Compliance: The instrument must adhere to Japanese banking regulations, which may differ from international or foreign regulatory frameworks. This could present complications for foreign monetizers.
• Due Diligence: The proposal does not clarify whether the branch’s operational capabilities and regulatory standing have been independently verified for such high-stakes transactions.

5. Procedural Vulnerabilities in the Hard Copy Approach

Hybrid Transmission Methodology:

The methodology involves sending a “secure email” confirmation followed by the dispatch of a physical hard copy via bank courier. This hybrid approach exposes the transaction to several risks:

• Physical Security Risks: Hard copies are inherently vulnerable to loss, theft, or damage during transit. Unlike digital instruments transmitted over secure, auditable networks (e.g., SWIFT), physical documents lack an immutable electronic trail.
• Verification Challenges: While the proposal asserts that verification can be accomplished “by phone, email or letter,” these methods do not provide the robust audit trail and instantaneous confirmation that modern electronic systems offer.
• Outdated Practice: The insistence on using hard copies “because no SWIFTs are needed internally” suggests a reliance on antiquated processes. In today’s banking environment, the absence of SWIFT or similar electronic clearing mechanisms could be interpreted as non-compliance with contemporary security and regulatory standards.
• Chain-of-Custody Issues: Without a rigorous and tamper-proof chain of custody, the legitimacy and authenticity of the physical document could be challenged, potentially leading to disputes or even fraudulent alterations.
• Implications for Cross-Border Transactions:

Hard copies sent outside the conventional banking system may encounter difficulties in international legal contexts. The physical nature of the instrument could complicate cross-border recognition and enforcement, especially if discrepancies arise between the digital confirmation and the physical document.

6. Due Diligence and Risk Mitigation

Insufficient Safeguards:

The proposal outlines a due diligence (DD) process for monetizers; however, the procedures appear cursory given the magnitude of the transaction. There is no mention of:

• Independent Verification: Third-party audits or independent confirmations of the funds’ availability are not discussed.
• Anti-Money Laundering (AML) Measures: Robust AML and know-your-customer (KYC) protocols are critical, especially when large sums and international entities are involved.
• Legal Review: The absence of an explicit legal review process could lead to unforeseen contractual liabilities or regulatory breaches.
• Operational Risks:

The reliance on multiple communication channels (secure email, courier, telephone) introduces operational risks. Miscommunications or delays in any of these channels could derail the transaction and expose the parties to reputational and financial harm.

In summary, the proposal exhibits significant vulnerabilities ranging from ambiguous instrument classification and outdated hard copy processes to potential conflicts of interest and regulatory compliance concerns. Adopting modern, electronically verifiable, and standardised procedures, coupled with enhanced due diligence, would mitigate many of these risks and better align the transaction with contemporary best practices in international finance.

SBLCs & BGs for Monetization?

SBLCs and bank guarantees are, by design, instruments of absolute commitment, ensuring that the full nominal amount is available upon demand. The instruments are typically collateralised at 100% of their face value to safeguard the issuing bank against unforeseen defaults. However, when one contemplates securing such instruments with 100% securities (plus associated bank fees) only to approach a third-party monetise—who may yield merely 80% of the instrument’s value—the economic rationale unravels. 

The Inefficiency of Over-Securing and Discounted Monetisation 

Capital Efficiency and Opportunity Costs 

When an entity is required to pledge 100% of the instrument’s value as collateral and incur additional bank fees, it is effectively immobilising assets equivalent to the full nominal amount. If a monetiser then only offers a discounted liquidity value of 80%, for instance, the entity is essentially sacrificing 20% of the instrument’s worth—and more, once fees are factored in. This practice is tantamount to an inefficient utilisation of capital, as the locked assets could potentially yield higher returns if deployed elsewhere. The opportunity cost here is substantial: funds tied up as securities are rendered unavailable for alternative investments that might offer a more favourable risk-return profile. 

Risk-Return Imbalance 

From a risk management perspective, the arrangement introduces an inherent imbalance. The bank, in issuing an SBLC or guarantee, exposes itself to a contingent liability which is entirely mitigated by 100% collateralisation. Yet, if the instrument is later monetised at a discount, the party providing the collateral does not recover the full value of their committed assets. Essentially, they shoulder not only the risk of the underlying transaction but also an implicit loss due to the discrepancy between the collateral provided and the monetised proceeds. This imbalance undermines the economic viability of the entire transaction, as the effective cost of obtaining liquidity through this route far exceeds its benefits. 

Redundancy of Financial Engineering 

In many respects, the procedure of over-securing an instrument only to monetise it at a discounted rate becomes a redundant exercise in financial engineering. The original purpose of securing the instrument is to provide absolute assurance of payment or performance. However, if a third party is then involved in converting this assurance into cash at an 80% yield, the process introduces an unnecessary intermediary step that erodes value. The inherent full commitment of the instrument is nullified by the fact that only a fraction of that commitment is realised in liquid form. The cost incurred in terms of both collateral and fees effectively negates any potential financial benefit that might have been derived from such an arrangement. 

Illustrative Examples 

Example 1: International Trade Finance 

Consider an exporter who requires an SBLC worth USD 1,000,000 to secure payment from an overseas buyer. The importer’s bank demands a collateral deposit of USD 1,000,000 along with bank fees to issue the SBLC. If the exporter then attempts to monetise this instrument through a specialised financial intermediary that offers a monetisation rate of 80%, the exporter would receive only USD 800,000 in liquid funds. In this scenario, the exporter has committed assets worth USD 1,000,000 (plus fees) yet recoups merely 80% of that value, resulting in a 20% loss of capital efficiency. 

Example 2: Construction Contract Performance Guarantee 

A construction firm may be required to secure a bank guarantee of £500,000 to assure a developer of its performance. The firm must provide collateral of the full £500,000 and pay the requisite bank fees. Should the firm decide, for any reason, to monetise this guarantee—perhaps to free up working capital—a third-party monetiser might only offer £400,000. Here, the firm suffers an immediate diminution of value, as the full extent of its collateral is not converted into equivalent liquidity, thereby rendering the process economically unsound. 

Example 3: Joint Venture Performance Assurance 

In a joint venture, one party might be obligated to provide a bank guarantee of EUR 750,000. To secure this instrument, the party pledges EUR 750,000 in securities plus incurs additional fees. If a monetisation attempt through a third-party facility results in an 80% liquidity conversion, only EUR 600,000 is recovered. This discrepancy illustrates the inefficacy of the approach: the entity has effectively sacrificed EUR 150,000 in potential capital value (excluding fees) merely to access funds that could have been more efficiently allocated or utilised elsewhere. 

Conclusion and Alternative Approaches 

Alternative Solutions: 

• Direct Credit Facilities: Rather than leveraging SBLCs for liquidity, entities might consider negotiating direct credit lines or overdraft facilities which do not require full collateralisation and thus preserve capital efficiency. 
• Securitisation with Better Terms: If monetisation is essential, seeking arrangements where the discount rate is significantly less onerous—through improved credit ratings or more favourable market conditions—could enhance overall returns. 
• Structured Collateral Management: Utilising dynamic collateral management techniques to adjust the level of security in real-time might mitigate some inefficiencies, though the fundamental disparity between collateral and monetised value remains. 

While SBLCs and bank guarantees are indispensable in securing absolute financial commitment, structuring them with 100% collateral plus fees only to monetise at a discount (for instance, 80%) is economically unsound. Such an approach inefficiently utilises capital, creates a risk-return imbalance, and introduces superfluous financial layering that ultimately erodes net benefit.