Historical bonds
Bonds that were once valid obligations of American entities but are now worthless as securities and only collected and traded as memorabilia -- are quickly becoming a favorite tool of scam artists. Here are several things that you should know about them:
Three Lies Used to Perpetrate Historical Bond Fraud:
Lie 1 : Historical bonds are payable in gold.
Lie 2: Historical bonds are backed by the Treasury Department.
Lie 3: The Treasury Department has established a federal sinking fund to retire historical bonds.
How Scam Artists Use Bogus Third-Party Valuations to Trick Investors
Scam artists are selling historical bonds to unsophisticated investors at inflated prices far exceeding their fair value as collectibles. They often use third-party valuations, which state that the bonds are worth million or billions of dollars each, to do so. These valuations or authentications, which are often referred to as "hypothecated" or "hypothetical," are completely bogus. A typical valuation will falsely overstate the value of these bonds by assuming erroneously that, notwithstanding the unenforceability of the gold clauses contained in the bonds, as well as the defunct and bankrupt status of most of the bonds' issuers, some person or entity is obligated to redeem the bonds in gold bullion.
Scam artists using such valuations may also make the false assertion that while perhaps not payable today in gold or in money, the bonds are used in high-yield trading programs in the United States, offshore and in Europe. In several cases, the third parties issuing the valuations appear to be working in conjunction with the scam artists. All of these false assertions have been used to defraud investors into paying as much as $150,000 for historical bonds that regularly trade for $25.
Fraudulent Cash and Railroad Bond Program Operator List
Part I consists of those individuals who, through their own words and deeds, have proven themselves cons to unwary investors and have been reported to the various authorities for their Securities Violations. Part II consists of the business names through which these individual have been known to operate. Pertinent notes are sometimes annotated to clarify level of involvement in the fraud and how interconnected.
Extreme caution should be exercised in transactions that may utilize these individuals. Deception has been utilized to cover their involvement in many a transaction by hiding behind other parties. Latest is to, now more than ever, hide under a completely new "front man" and place their "Program" with parties published herein. This list is not all-inclusive and should not be viewed as such.
The author of this publication, Henry R. Wentworth, has spent years developing the database contained herein. His second publication, Bank Debentures: Names You Should Know, contains a database with a focus on the market for ‘bank Debentures.’
Sunday, June 6, 2010
Warning from the IMF against financial schemes misusing its name
In view of widespread and continuing inquiries from individuals and companies who have been approached by parties in connection with offers of participation in various financial instruments and schemes promising high returns and unauthorizedly using the name of the International Monetary Fund (IMF), the Treasurer of the IMF today again warned potential investors to beware of such schemes. He had already issued warnings in the past (see News Brief Number 94/5, published February 23, 1994 and News Brief Number 94/11, published May 13, 1994). Today he reiterated that the IMF does not issue or guarantee any obligations called "Prime Bank Notes," "Prime Bank Guarantees," "Bill of Exchange," or "Bill of Equity," or extend any credit lines through commercial banks or other agencies. Moreover, the IMF does not guarantee debentures or other financial instruments issued by a member country or any other entity. It does not sponsor investment programs, "high-yield financial programs," or issue to countries or to outside parties an "IMF Number," "IMF Country Registration Number," or an "IMF Approval Number for Projects."
Other examples of bogus instruments often featured in such schemes which unauthorizedly use the name of the IMF are:
* fictitious stand-by letters of credit--falsely portrayed as risk-free and sanctioned by the IMF;
* securities allegedly backed by the IMF; and
* bonds supposedly issued by the IMF.
The IMF is an intergovernmental organization whose financial transactions and operations are carried out directly with its member countries and only through a fiscal agency designated by each member for this purpose (such as the member's Central Bank or its Ministry of Finance). The IMF does not operate through other agents and it does not endorse the activities of any bank, financial institution, or other public or private agency.
Other examples of bogus instruments often featured in such schemes which unauthorizedly use the name of the IMF are:
* fictitious stand-by letters of credit--falsely portrayed as risk-free and sanctioned by the IMF;
* securities allegedly backed by the IMF; and
* bonds supposedly issued by the IMF.
The IMF is an intergovernmental organization whose financial transactions and operations are carried out directly with its member countries and only through a fiscal agency designated by each member for this purpose (such as the member's Central Bank or its Ministry of Finance). The IMF does not operate through other agents and it does not endorse the activities of any bank, financial institution, or other public or private agency.
Standby Letters of Credit: The Private Primary Market
Designed to provide much of the information required for conducting a due diligence investigation.
Lender/Investors are skeptical of opportunities that offer above-market returns. If significant capital is required, little information is readily available with which to conduct a due diligence investigation, there is little motivation for committing funds.
Issues Covered
* A letter from the Securities and Exchange Commission, (S.E.C) stating that letters of credit are exempt from registration under the Securities Act of 1933.
* An opinion from the U.S Supreme Court stating that letters of credit, when acquired for cash, are the equivalent of a deposit liability.
* A legal historical example of a clean standby letter of credit, the text of which is clean of any requirements of documentation of nonperformance or default for the beneficiary to obtain payment.
* A discussion of the role of the International Chamber of Commerce in encouraging more equitable practices in the area of standby letters of credit.
* A discussion of case law and legal writing showing that pertaining law has developed away from domestic concepts and structures, and that it is a fallacy to think in terms of a comprehensive body of domestic law on LOC and especially in terms of diversity of national laws.
* A discussion of transmission, authenticity and the operative instrument; how it is determined when a transmission is authentic and legal.
* The issuance of standby LOC involves the separation of many of the services associated with lending, such as credit risk evaluation and underwriting, from funding.
* Banks argue that they are in the risk management business - whether on or off the balance sheet.
* An important difference between a standby LOC and conventional financing with uninsured depositors is that a standby LOC beneficiary retains the loan in the event of bank failure as opposed to having to stand in line with the FDIC and other creditors to recover the remaining assets of the bank.
* The greatest motivation for off-balance sheet banking is the opportunity cost of funding assets with reservable deposits without a binding capital constraint.
* In issuing an off-balance sheet instrument, the bank acts as a third party in a commercial transaction, substituting the bank's credit worthiness for that of its customer to facilitate exchange while sharing some of its risk with the lender/investor.
* In effect, banks are willing to rent their credit standing or borrow credit analysis to lender/investors by guaranteeing the payment of principal and interest-which may be of value to a bank customer who is not well known or established. This enables a bank to receive an underwriting fee that can bolster current profits without tieing up capital.
* A bank may not be asked to issue a guarantee unless it is perceived by the market to be strong.
* How a standby LOC is similar to an uninsured deposit and subordinated note in that it's value varies inversely with the credit risk of the bank.
* The incentive to the lender/investor? The return on this arrangement is likely to be greater than that of a deposit while still maintaining insurance against loss.
* The types of entities who acquire standby LOC.
* A discussion of repurchase programs and credit-enhanced loan transactions.
EVERY STATEMENT IN THESE REFERENCES EITHER A LEGAL PRECEDENT, REPORT OR LETTER ISSUED BY A GOVERNMENT AGENCY, TRADE PUBLICATION OR KNOWN ENTITY IN BANKING AND FINANCE.
Lender/Investors are skeptical of opportunities that offer above-market returns. If significant capital is required, little information is readily available with which to conduct a due diligence investigation, there is little motivation for committing funds.
Issues Covered
* A letter from the Securities and Exchange Commission, (S.E.C) stating that letters of credit are exempt from registration under the Securities Act of 1933.
* An opinion from the U.S Supreme Court stating that letters of credit, when acquired for cash, are the equivalent of a deposit liability.
* A legal historical example of a clean standby letter of credit, the text of which is clean of any requirements of documentation of nonperformance or default for the beneficiary to obtain payment.
* A discussion of the role of the International Chamber of Commerce in encouraging more equitable practices in the area of standby letters of credit.
* A discussion of case law and legal writing showing that pertaining law has developed away from domestic concepts and structures, and that it is a fallacy to think in terms of a comprehensive body of domestic law on LOC and especially in terms of diversity of national laws.
* A discussion of transmission, authenticity and the operative instrument; how it is determined when a transmission is authentic and legal.
* The issuance of standby LOC involves the separation of many of the services associated with lending, such as credit risk evaluation and underwriting, from funding.
* Banks argue that they are in the risk management business - whether on or off the balance sheet.
* An important difference between a standby LOC and conventional financing with uninsured depositors is that a standby LOC beneficiary retains the loan in the event of bank failure as opposed to having to stand in line with the FDIC and other creditors to recover the remaining assets of the bank.
* The greatest motivation for off-balance sheet banking is the opportunity cost of funding assets with reservable deposits without a binding capital constraint.
* In issuing an off-balance sheet instrument, the bank acts as a third party in a commercial transaction, substituting the bank's credit worthiness for that of its customer to facilitate exchange while sharing some of its risk with the lender/investor.
* In effect, banks are willing to rent their credit standing or borrow credit analysis to lender/investors by guaranteeing the payment of principal and interest-which may be of value to a bank customer who is not well known or established. This enables a bank to receive an underwriting fee that can bolster current profits without tieing up capital.
* A bank may not be asked to issue a guarantee unless it is perceived by the market to be strong.
* How a standby LOC is similar to an uninsured deposit and subordinated note in that it's value varies inversely with the credit risk of the bank.
* The incentive to the lender/investor? The return on this arrangement is likely to be greater than that of a deposit while still maintaining insurance against loss.
* The types of entities who acquire standby LOC.
* A discussion of repurchase programs and credit-enhanced loan transactions.
EVERY STATEMENT IN THESE REFERENCES EITHER A LEGAL PRECEDENT, REPORT OR LETTER ISSUED BY A GOVERNMENT AGENCY, TRADE PUBLICATION OR KNOWN ENTITY IN BANKING AND FINANCE.
The Prime Bank Instrument Raises Its (Ugly) Head Again
May 8, 1998 - The Vancouver Sun newspaper ran a story about a couple who lost $70,000 Canadian in a prime bank instrument program. Their's is not an isolated case.
Selling the sizzle is what these fraudsters are good at, and the good ones ply their trade with all the finesse and confidence of Wall Street promoters. The prime bank note or bank roll program has been around for years, but like the Nigerian Scam, it continues to catch new victims. According to the International Chamber of Commerce's commercial crime bureau, it involves $10 million US daily in North America alone.
The Sun story explained how Bob and Robin Blanchard borrowed the money to invest in the program in 1995 after signing a non-disclosure statement to prevent them from talking about the deal with anyone, including lawyers, financial advisors because they were joining " a priviledged group getting in on a very exclusive investment" which relies on secrecy.
What makes gives the scam it's allure is the idea that those who partake are joining an elite group of investors with access to extremely valuable and highly confidential information. Although there are a number of variations, the principle is the same. The big banks around the world lend each other money by issuing notes with face values of $100 million or more. These notes can be re-sold number of times at a discount (profit) to other lenders so that the original issuer can reap a handsome profit in a relatively short time. The figure commonly bandied about is 30% per month. The term of the notes vary from 30 days to a year or more.
Small investors must pool their money to build it up to a minimum $10 to $100 million so brokers get involved. Often a tax haven country is used to add to the intrigue and no tax need be paid by the shrewd investor, or at least that is what they are told.
To make the story more believeable, the names of large, well-known international banks like Barclays, Lloyds Bank and Chase Manhatten are used.
To the scrupulous investor there are some danger signals that should tip you off.
1. You are told as an investor and not a principle (you don't have $10 million US) you have no personal security. The broker will tell you that there is no need to worry because every penny is secured by an LC (Letter of Credit) or other guaranteed bank certificate.
2. You are told not to phone the bank who's name you are given because they cannot acknowledge the existence of such an arrangement unless you are the principle.
3. There is a high degree of trust necessary. The broker will tell you that he has no interest in stealing your money because he makes enough from the deal already, and besides, he wants to have you participate in the next program so you and he can get rich together.
4. You are told not to seek professional advice because the information is reserved only for those who participate in the program. Strangely few if any lawyers or professional advisors are invited into the program.
Often exotic sounding banking terms are bandied around that are confusing to all but the professional banker or investor. This is done to intentionally confuse and intimidate the victim so that they feel too self-conscious to ask questions. You might even be shown what appear to be high quality documents purporting to be from genuine lending institutions but there is no way to check their authenticity. Usually they are either worthless or forged.
The sad part is that the victim may not fully appreciate their true fate until years later. The brokers will keep the dream alive by saying that the profits have been re-invested and may even attempt to lure the victim into another scheme before they realize what they are into.
Selling the sizzle is what these fraudsters are good at, and the good ones ply their trade with all the finesse and confidence of Wall Street promoters. The prime bank note or bank roll program has been around for years, but like the Nigerian Scam, it continues to catch new victims. According to the International Chamber of Commerce's commercial crime bureau, it involves $10 million US daily in North America alone.
The Sun story explained how Bob and Robin Blanchard borrowed the money to invest in the program in 1995 after signing a non-disclosure statement to prevent them from talking about the deal with anyone, including lawyers, financial advisors because they were joining " a priviledged group getting in on a very exclusive investment" which relies on secrecy.
What makes gives the scam it's allure is the idea that those who partake are joining an elite group of investors with access to extremely valuable and highly confidential information. Although there are a number of variations, the principle is the same. The big banks around the world lend each other money by issuing notes with face values of $100 million or more. These notes can be re-sold number of times at a discount (profit) to other lenders so that the original issuer can reap a handsome profit in a relatively short time. The figure commonly bandied about is 30% per month. The term of the notes vary from 30 days to a year or more.
Small investors must pool their money to build it up to a minimum $10 to $100 million so brokers get involved. Often a tax haven country is used to add to the intrigue and no tax need be paid by the shrewd investor, or at least that is what they are told.
To make the story more believeable, the names of large, well-known international banks like Barclays, Lloyds Bank and Chase Manhatten are used.
To the scrupulous investor there are some danger signals that should tip you off.
1. You are told as an investor and not a principle (you don't have $10 million US) you have no personal security. The broker will tell you that there is no need to worry because every penny is secured by an LC (Letter of Credit) or other guaranteed bank certificate.
2. You are told not to phone the bank who's name you are given because they cannot acknowledge the existence of such an arrangement unless you are the principle.
3. There is a high degree of trust necessary. The broker will tell you that he has no interest in stealing your money because he makes enough from the deal already, and besides, he wants to have you participate in the next program so you and he can get rich together.
4. You are told not to seek professional advice because the information is reserved only for those who participate in the program. Strangely few if any lawyers or professional advisors are invited into the program.
Often exotic sounding banking terms are bandied around that are confusing to all but the professional banker or investor. This is done to intentionally confuse and intimidate the victim so that they feel too self-conscious to ask questions. You might even be shown what appear to be high quality documents purporting to be from genuine lending institutions but there is no way to check their authenticity. Usually they are either worthless or forged.
The sad part is that the victim may not fully appreciate their true fate until years later. The brokers will keep the dream alive by saying that the profits have been re-invested and may even attempt to lure the victim into another scheme before they realize what they are into.
So-called "Prime" Bank and Similar Financial Instruments
The Securities and Exchange Commission is alerting investors to the recent rise in possibly fraudulent schemes involving the issuance, trading or use of so-called "prime" bank, "prime" European bank or "prime" world bank financial instruments. These instruments typically take the form of notes, debentures, letters of credit, and guarantees. Also typical in the offer of these instruments is the promise or guarantee of unrealistic rates of return, for example, a 150 percent annualized rate of "profits." Common targets of these schemes include both institutional and individual investors, who may also be induced to participate in possible "Ponzi" schemes involving the pooling of investors' funds to purchase "prime" bank financial instruments.
On October 21, 1993, federal financial institution supervisory agencies issued an Interagency Advisory to their regulated financial institutions. The Interagency Advisory warned of the use of schemes involving "prime" bank financial instruments and noted that:
* Individuals have been improperly using the names of large, well-known domestic and foreign banks, the World Bank, and central banks in connection with their "Prime Bank" schemes.
* The named institutions "had no knowledge about the unauthorized use of their names or the issuance or anything akin to 'Prime Bank'-type financial instruments."
* The staffs of the federal supervisory agencies are unaware of the legitimate use of any financial instrument called a "Prime Bank" note, guarantee, letter of credit, debenture, or similar type of financial instrument.
* Financial institutions should watch for the attempted use of traditional types of financial instruments that are referred to in an unconventional manner, "such as a letter of credit referencing forms allegedly produced or approved by the International Chamber of Commerce."
As to this latter point, the Interagency Advisory referred to examples of "bogus schemes involving the supposed issuance of an 'ICC 3034' or an 'ICC 3039' letter of credit by a domestic or foreign bank."
The Interagency Advisory also noted that many of the illegal or dubious schemes "appear to involve overly complex loan funding.
These schemes do not involve the offer or sale of financial instruments issued by any financial institution having the word "prime" in its name; rather, that word (or a synonym, as in the phrase "top fifty world banks") is used to refer, generically, to financial institutions of purportedly high repute and financial soundness. These agencies are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.
In the eyes of an unsophisticated investor, this complexity may make a questionable investment appear worthwhile. The SEC warns investors and those who may advise them, particularly broker-dealers and investment advisors, of this possible hallmark of fraud and reminds them of a basic rule for avoiding securities fraud, "If it looks too good to be true, it probably is!"
On October 21, 1993, federal financial institution supervisory agencies issued an Interagency Advisory to their regulated financial institutions. The Interagency Advisory warned of the use of schemes involving "prime" bank financial instruments and noted that:
* Individuals have been improperly using the names of large, well-known domestic and foreign banks, the World Bank, and central banks in connection with their "Prime Bank" schemes.
* The named institutions "had no knowledge about the unauthorized use of their names or the issuance or anything akin to 'Prime Bank'-type financial instruments."
* The staffs of the federal supervisory agencies are unaware of the legitimate use of any financial instrument called a "Prime Bank" note, guarantee, letter of credit, debenture, or similar type of financial instrument.
* Financial institutions should watch for the attempted use of traditional types of financial instruments that are referred to in an unconventional manner, "such as a letter of credit referencing forms allegedly produced or approved by the International Chamber of Commerce."
As to this latter point, the Interagency Advisory referred to examples of "bogus schemes involving the supposed issuance of an 'ICC 3034' or an 'ICC 3039' letter of credit by a domestic or foreign bank."
The Interagency Advisory also noted that many of the illegal or dubious schemes "appear to involve overly complex loan funding.
These schemes do not involve the offer or sale of financial instruments issued by any financial institution having the word "prime" in its name; rather, that word (or a synonym, as in the phrase "top fifty world banks") is used to refer, generically, to financial institutions of purportedly high repute and financial soundness. These agencies are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.
In the eyes of an unsophisticated investor, this complexity may make a questionable investment appear worthwhile. The SEC warns investors and those who may advise them, particularly broker-dealers and investment advisors, of this possible hallmark of fraud and reminds them of a basic rule for avoiding securities fraud, "If it looks too good to be true, it probably is!"
Paper Trading
What percentage of new clients paper trade before actually risking real money in the futures markets?
Not surprisingly a lot of new traders get their feet wet by first taking trades on paper and recording theoretical results. Probably half of all new traders that we work with take this approach in the beginning. Often though, success on paper looks easy and these traders are tempted to risk real dollars before they have really had their confidence tested.
Before their confidence has been tested? In your opinion what's a reasonable amount of time for someone to get this sort of confidence?
Trading on paper can be deceptive, and after a few profitable trades in a row (on paper), people tend to feel like they are missing out by not having actual dollars in the market(s). Unfortunately a really important part of being a good trader has to do with keeping your perspective when you go through losing periods, which are inevitable. Unless you have seen yourself and your trading methods go through a number of these profit/loss cycles, it is hard to have this perspective.
For most people, it is probably a good idea to paper trade for at least 3-6 months before risking real money. Some people get bored with this, of course, and simply choose to “pay their tuition up front.” This trial-by-fire approach will help hold your interest, but obviously, it can be expensive.
Not surprisingly a lot of new traders get their feet wet by first taking trades on paper and recording theoretical results. Probably half of all new traders that we work with take this approach in the beginning. Often though, success on paper looks easy and these traders are tempted to risk real dollars before they have really had their confidence tested.
Before their confidence has been tested? In your opinion what's a reasonable amount of time for someone to get this sort of confidence?
Trading on paper can be deceptive, and after a few profitable trades in a row (on paper), people tend to feel like they are missing out by not having actual dollars in the market(s). Unfortunately a really important part of being a good trader has to do with keeping your perspective when you go through losing periods, which are inevitable. Unless you have seen yourself and your trading methods go through a number of these profit/loss cycles, it is hard to have this perspective.
For most people, it is probably a good idea to paper trade for at least 3-6 months before risking real money. Some people get bored with this, of course, and simply choose to “pay their tuition up front.” This trial-by-fire approach will help hold your interest, but obviously, it can be expensive.
The International Bank Debenture Trading
Introduction
The following document has been prepared based upon all the available information and is largely a hypotheses, due to the fact that much of the information is hearsay and unsubstantiated. The basis in fact, however, is strong and several documents which re attached as appendices give a detailed summary of the information and reasoning behind this document.
Basic history of specific types of credit instruments
The issuance of bank (credit) instruments dates back to the early days of "banking" when private wealthy individuals used their capital to support various trade orientated ventures. Promissory Notes, Bills of Exchange, Bankers Acceptances and Letters of Credit have all been a part of daily "bank" business for many years.
There are three types of Letters of Credit which are issued on a daily basis. These are Documentary Letters of Credit, Standby Letters of Credit and Unconditional Letters of Credit or Surety Guarantees.
The issuance of a "Letter of Credit" usually takes place when a bank customer (Buyer) wishes to buy or acquire goods or services from a third party (Seller). The Buyer will cause his bank to issue a Letter of Credit which "guarantees" payment to the Seller via the Seller's bank conditional against certain documentary requirements. In other words, when the Seller via his bank represents certain documents to the Buyer's bank the payment will be made. These documentary requirements vary from transaction to transaction, however, the normal type of documents will usually comprise of:
- Invoice from Seller (usually in triplicate)
- Bill of Lading (from Shipper)
- certificate of Origin (from the Seller)
- Insurance documents (to cover goods in transit)
- Export Certificate (if goods are for export)
- Transfer of Ownership (from the Seller)
These documents effectively "guarantee" that the goods were "sold" and are "en route" to the Buyer. The Buyer is secure in the fact that he has "bought" the items or services and the Seller is secure in the fact that the Letter of Credit, which was delivered to him prior to the loading or release of the goods, will "guarantee" payment if he complies with the terms of the Letter of Credit.
This type of transaction takes place every day throughout the world, in every jurisdiction and without any fear that the issuing bank will not "honour" its obligation, providing that the bank if of an acceptable stature.
The Letter of Credit is issued i a manner which has been recognised by the Bank for International Settlements (B.I.S.) and the International Chamber of Commerce (I.C.C), and is subject to the uniform rules of collection for documentary credits (ICC 400, 1983).
This type of instrument is normally called a Documentary Letter of Credit ("DLC") and is always trade or transaction related, with an underlying sale of goods or services between the applicant (Buyer) and the Beneficiary (Seller).
During the evolution of the trade related Letters of Credit, a number of institutions began to issue Standby Letters of Credit )"SLC's"). These credit instruments were effectively a surety or guarantee that if the applicant (Buyer) failed to pay or perform under the terms of a transaction, the bank would take over the liability and pay the beneficiary (Seller).
In the United States banks are prohibited by regulation from providing formal guarantees and instead offer these instruments as a functional equivalent of a guarantee.
A conventional Standby Letter of Credit (CSLC) is an irrevocable obligation in the form of a Letter of Credit issued by a bank on behalf of its customer. If the bank's customer is unable to meet the terms and conditions of its contractual agreement with a third party, the issuing bank is obligated to pay the third party (as stipulated in the terms of the CSLC) on behalf of its customer. A CSLC can be primary (direct draw on the Bank) or secondary (available in the event of default by the customer to pay the underlying obligation). [Extracts from "recent Innovations in International Banking - April 1986 prepared by a study group established by the Central Banks of the Group of Ten Countries and published by the Bank for International Settlements.]
As these Standby Letters of Credit were effectively contingent liabilities based upon the potential formal default or technical default of the applicant, they are held "off balance" sheet in respect to the bank's accounting principles.
This type of Letter of Credit is commonly referred to in the market place as a short form format. This number is not found as a specific ICC 400 (1983) reference and is purported to be a federal court docket reference number which is related to a law suit involving such instrument, no details are available to the author.
The following document has been prepared based upon all the available information and is largely a hypotheses, due to the fact that much of the information is hearsay and unsubstantiated. The basis in fact, however, is strong and several documents which re attached as appendices give a detailed summary of the information and reasoning behind this document.
Basic history of specific types of credit instruments
The issuance of bank (credit) instruments dates back to the early days of "banking" when private wealthy individuals used their capital to support various trade orientated ventures. Promissory Notes, Bills of Exchange, Bankers Acceptances and Letters of Credit have all been a part of daily "bank" business for many years.
There are three types of Letters of Credit which are issued on a daily basis. These are Documentary Letters of Credit, Standby Letters of Credit and Unconditional Letters of Credit or Surety Guarantees.
The issuance of a "Letter of Credit" usually takes place when a bank customer (Buyer) wishes to buy or acquire goods or services from a third party (Seller). The Buyer will cause his bank to issue a Letter of Credit which "guarantees" payment to the Seller via the Seller's bank conditional against certain documentary requirements. In other words, when the Seller via his bank represents certain documents to the Buyer's bank the payment will be made. These documentary requirements vary from transaction to transaction, however, the normal type of documents will usually comprise of:
- Invoice from Seller (usually in triplicate)
- Bill of Lading (from Shipper)
- certificate of Origin (from the Seller)
- Insurance documents (to cover goods in transit)
- Export Certificate (if goods are for export)
- Transfer of Ownership (from the Seller)
These documents effectively "guarantee" that the goods were "sold" and are "en route" to the Buyer. The Buyer is secure in the fact that he has "bought" the items or services and the Seller is secure in the fact that the Letter of Credit, which was delivered to him prior to the loading or release of the goods, will "guarantee" payment if he complies with the terms of the Letter of Credit.
This type of transaction takes place every day throughout the world, in every jurisdiction and without any fear that the issuing bank will not "honour" its obligation, providing that the bank if of an acceptable stature.
The Letter of Credit is issued i a manner which has been recognised by the Bank for International Settlements (B.I.S.) and the International Chamber of Commerce (I.C.C), and is subject to the uniform rules of collection for documentary credits (ICC 400, 1983).
This type of instrument is normally called a Documentary Letter of Credit ("DLC") and is always trade or transaction related, with an underlying sale of goods or services between the applicant (Buyer) and the Beneficiary (Seller).
During the evolution of the trade related Letters of Credit, a number of institutions began to issue Standby Letters of Credit )"SLC's"). These credit instruments were effectively a surety or guarantee that if the applicant (Buyer) failed to pay or perform under the terms of a transaction, the bank would take over the liability and pay the beneficiary (Seller).
In the United States banks are prohibited by regulation from providing formal guarantees and instead offer these instruments as a functional equivalent of a guarantee.
A conventional Standby Letter of Credit (CSLC) is an irrevocable obligation in the form of a Letter of Credit issued by a bank on behalf of its customer. If the bank's customer is unable to meet the terms and conditions of its contractual agreement with a third party, the issuing bank is obligated to pay the third party (as stipulated in the terms of the CSLC) on behalf of its customer. A CSLC can be primary (direct draw on the Bank) or secondary (available in the event of default by the customer to pay the underlying obligation). [Extracts from "recent Innovations in International Banking - April 1986 prepared by a study group established by the Central Banks of the Group of Ten Countries and published by the Bank for International Settlements.]
As these Standby Letters of Credit were effectively contingent liabilities based upon the potential formal default or technical default of the applicant, they are held "off balance" sheet in respect to the bank's accounting principles.
This type of Letter of Credit is commonly referred to in the market place as a short form format. This number is not found as a specific ICC 400 (1983) reference and is purported to be a federal court docket reference number which is related to a law suit involving such instrument, no details are available to the author.
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